Succession Planning – PART 2

Succession planning is a critical part of any business, and not something that should be left until necessary. While it’s easy to think of it as simply a handoff to the next generation, it is so much more involved than that.

In this second of our two-part series on succession planning, we look at what you need to do to ensure you are ready to go with a robust succession plan at a moment’s notice, should you or your successors ever need to do so.

1). Estate planning

This is the first thing to think about. There should be a division of management and ownership control making it clear what the responsibilities are of the management versus the ownership. Those have to be defined. If not, situations can arise where upon succession, inheriting heirs think they should be playing a part in running the business when they have no idea what’s involved.

The same applies to silent partners. If the business owner passes, a silent partner may think they now own the business and can take over, despite never having worked in the organization. A succession plan with clear estate planning will prevent situations like this arising.

2). Emergency folder

Ensure all your documents are in order and in one place – an emergency folder.

In the event of an emergency situation that leads to “unplanned” succession, the relevant people need to be able to quickly locate your critical business documents in one place, both hard copies and soft copies. Your emergency folder should contain operating agreements, bylaws that define ownership, your buy-sell clause, voting and non-voting shares, and so on.

You should ensure a trusted third party, ideally without an interest in the business, also has a copy of the emergency folder.

This folder is also necessary if the succession comes in the form of an M&A. Potential buyers are going to want to see all these documents, so having them easily to hand is essential for all kinds of succession planning.

3). Plan for a transition

As well as having all your relevant documentation up to date and in an easily identifiable location, you should plan for a transition by creating a working team of advisors and identifying potential successors.

Your team of advisors should be a group of trusted people around you that know what the business does and how to how to keep it running. They should have easy access to your emergency folder, and can be utilized now to do regular checkups on the business with you and for you to ensure familiarity with the workings of the organization.

Identifying potential successors means that if a business gets passed on to family members who may not be familiar with its workings, they will have contacts that can help them get to the next step should they want to explore a sale or M&A, which they may well do.

4). Tax planning structure

It can often be the case that when the time comes to either sell the business or take it over as the anointed successor, the tax liabilities come as a shock. In order to prevent the business having to manage unexpected taxes, there are things you can do as part of you succession planning that will limit the impact.

Speak to your tax attorney to know exactly what the tax liabilities will be when the time comes for succession. They are able to advise on the myriad avenues you can take to manage these liabilities and find ways to limit their impact.

By executing these simple steps, your succession planning will be efficient, effective, and ready to go when the time comes. You cannot expect a smooth transition – and one that can happen under stressful, unexpected circumstance – without a succession plan in place. Following these simple steps will help you or your successors manage the business easily when the time comes to pass it over to the next leaders.

Don’t forget to check out the first article in the series – HERE – illustrating the key circumstances under which a succession plan becomes critical.