Succession planning represents one of the most critical yet often overlooked aspects of business ownership. While entrepreneurs typically excel at building and growing their ventures, many ironically fail to adequately prepare for the inevitable transition of leadership and ownership.
For business owners, succession planning isn’t just about who takes over the company. It’s about protecting the legacy they’ve worked so hard to create and setting up the next generation to follow on.
The Critical Nature of Succession Planning
According to research by PwC, only 34% of family businesses have a robust, documented succession plan in place, despite 40% of business owners planning to retire in the next five years (PwC Family Business Survey). This disconnect highlights a significant gap between intention and action when it comes to business continuity planning.
“Succession planning isn’t just for large corporations or family businesses preparing for generational transfer,” says David Kaplan, co-founder of Willed, an online will writing service. “Every business owner needs to consider what happens to their business if they’re suddenly unable to run it, whether that may be due to retirement, illness, or unexpected death.”
Effective succession planning provides numerous benefits beyond just determining who takes over:
- Business continuity during transitions
- Preservation of company value
- Minimised disruption for employees, clients, and suppliers
- Reduced tax implications during ownership transfer
- Protection of the owner’s legacy and vision
Key Components of Business Succession Planning
A comprehensive succession plan should address several critical elements:
1. Leadership Transition Strategy
Identify and develop potential successors, whether they’re family members, existing employees, or external candidates. This often involves mentoring programs, progressive responsibility assignments, and clear communication about expectations and timelines.
2. Ownership Transfer Structure
Determine how ownership will be transferred. This could involve:
- Family succession
- Management buyout
- Employee stock ownership plans (ESOPs)
- Sale to an external party
- Merger with another company
3. Business Valuation
One of the biggest mistakes business owners make is not having an accurate, up-to-date valuation of their business, according to Kaplan. “Without knowing what your business is worth, it’s impossible to make informed decisions about selling, transferring ownership, or estate planning.”
Regular business valuations help owners understand the true value of their most significant asset and make decisions accordingly.
The Estate Planning Connection
While succession planning focuses on the business itself, estate planning addresses how business assets integrate with personal finances and legacy wishes. The two planning processes should work in concert.
“Business succession planning and personal estate planning are inseparable for business owners,” Kaplan says. And he’s right. Your business is likely your most valuable asset, and how it transfers after your death has enormous implications for your estate and your beneficiaries.
A proper estate plan for business owners should include:
Business Ownership Transfer Instructions
Your will should clearly outline what happens to your business interests, including specific instructions about who inherits shares or ownership and under what conditions.
There have been cases where a business owner’s will was silent about their business interests, resulting in partnership disputes and even business failure after their passing. According to Kaplan, these situations are completely avoidable with proper planning.
Buy-Sell Agreements
These legally binding agreements specify what happens to a business owner’s share if they die, become disabled, or want to exit the business. They often include provisions for how shares will be valued and purchased by remaining owners or the company itself.
Key Person Insurance
This insurance policy names the business as beneficiary in the event of an owner’s or key employee’s death, providing liquid funds to weather the transition and potentially buy out the deceased owner’s share from their estate.
Digital Assets and Intellectual Property
Modern businesses increasingly rely on digital assets and intellectual property. These assets require special consideration in both succession and estate planning.
Kaplan also points out that business owners need to ensure their succession plans address digital assets, from social media accounts to proprietary software and customer databases. “Without proper documentation and access instructions, these valuable assets can be lost or compromised during transition,” he says.
Starting the Process
The succession planning process should begin years before an anticipated exit, allowing time for:
- Identification and development of successors
- Implementation of tax minimisation strategies
- Preparation of the business for transfer or sale
- Integration with personal estate planning
- Communication with key stakeholders
“The biggest mistake is waiting too long,” warns Kaplan. “Starting early allows for thoughtful planning rather than crisis management. We recommend business owners begin succession planning at least five years before their intended exit.”
Seeking Professional Guidance
Given the complexity of succession planning, most business owners benefit from professional assistance. This typically includes:
- Business attorneys
- Tax specialists
- Financial advisors
- Estate planning professionals
- Business valuation experts
Business owners who address their estate planning as part of a comprehensive succession strategy have much smoother transitions, notes Kaplan. “When personal and business planning work together, the owner’s legacy is truly protected.”
