What is Succession Planning?
Succession Planning is the process of identifying and developing internal personnel who have the potential to fill key leadership positions within an organization. It involves identifying the critical roles and functions within an organization, assessing the skills and experience required for these roles, and developing strategies to ensure that the right people are in place to fill these positions in the future.
While many organizations understand the importance of succession planning, few take the time to develop and implement effective strategies. However, it is critical that companies have a plan in place for ensuring the continuity of their business operations in the event of unexpected departures or retirements.
Why does your business need succession planning?
- The future of a business depends on having a suitable succession plan. Many businesses that fail to have plans, do not survive after even one generation. Having a succession plan will help to minimize any negative impacts on your business, and your employees when owners/founders exit the business.
- You risk the loss of younger or key talent. Conversations happen frequently with folks in their 40’s and 50’s that they are considering leaving and starting their own company because there is no plan in place. Failure to have a plan could lead to loss of key staff, and require you to work longer than anticipated.
When should you make a succession plan?
We recommend that owners begin thinking about succession at the start of the business. It seems counterintuitive, right? But succession planning is complicated. A common misconception is that others will just step into your shoes and run the business the same way, and that there will be no issues when an owner steps down. Generally, that doesn’t just happen.
Start succession planning now before you’re forced to address it, like in the event of an unexpected death or illness.
Where do we begin?
A good succession plan starts with identifying the goals that the owner wants to achieve. For example:
- How does the owner want to exit the company?
- How long does the owner want to work, and in what capacity? For example, full-time for a certain number of years, and then part-time once the owner transfers his/her interest.
- Owner control; How much does the owner want as he or she begins to wind down? Some owners want control until they are 100% no longer involved, and some owners are content to pass the torch when they first begin to slow down, or sell part of their interest.
- Does the owner want income over time or liquidity right away?
- Who are the players? Who are the potential successors? We have options.
- Employees, family members, third parties?
Other items to consider:
- The estate plan of the owner is another important consideration and must be reviewed to confirm it’s consistent with the succession plan.
- Tax consequences; the structure of your pan will affect the tax consequences.
- Other property; does the business own real estate and if so, is it held by another entity? Who owns that entity, and what happens with the real estate?
- The method the owner wants to use to pass on the successful business that they’ve built. These options include: Sell stock or LLC interest, sell the assets of the business, gift stock or LLC interest, or an ESOP (Employee Stock Ownership Plan)
- Business valuation
- How will you communicate the plan?
To implement the transaction, you’ll need to have proper documentation; That’s where our team of attorneys at Hilger Hammond come in. We like to meet with all parties when we implement a succession plan, to have a seamless transaction for everyone involved.
While succession planning may seem like a daunting task, having a plan that is clearly communicated can be a huge boost for company morale and retain employees.
Looking to take the next step? Connect with the Hilger Hammond team here to set up an personalized consultation that will address your specific needs.