5 Steps to Create a Smooth Succession Plan

As a well-established business owner, you’ve spent decades building a successful, profitable company that reflects your hard work and vision. But eventually, you’ll be ready to step down and you want to feel comfortable and confident in your successor’s ability to continue the legacy you worked so hard to build. At the same time, you want to ensure the transition to new ownership is legally sound and financially beneficial for all parties involved.

That’s where a well-constructed succession plan comes in. Without proper planning, business owners can face challenges including family disagreements, organizational instability and even financial loss.

By starting early and following a structured approach, you can create a roadmap that facilitates a smoother transition for everyone involved.

Quick facts:

● Planning early is key: Starting the succession process years before retirement can make for a smoother transition.

● Ownership transfer options vary: Consider payment structures, buy-sell agreements and entity restructuring.

● Successor training is essential: Preparing your business’s next leader through education and hands-on experience can better set them up for long-term success.

● Seek out professional advice: Financial planners and legal experts can guide you through the complicated succession planning process.

Step 1: Identify the key roles and responsibilities within your business

Perhaps the simplest place to start is to take stock of your business’s current operations and procedures. What are the critical functions that keep your company running? Which roles would you consider to be indispensable for its long-term success? Asking yourself questions like this can help you determine which specific areas of your business will require the most attention during a transition.

To stay organized, you may want to create a chart that outlines all major roles and their responsibilities within the business. This chart will serve as a guide for determining which positions your successor will need to fill or oversee. Additionally, evaluate whether any roles can be streamlined or delegated more effectively before the transition begins (especially if you are still involved in more front-of-house daily tasks).

Identifying these key roles also provides an opportunity to assess your business’s current operational efficiency. Are there gaps or redundancies in responsibilities? Addressing these now will make the transition smoother for everyone involved when the time eventually comes.

Step 2: Identify your successor and begin training

Choosing a successor is one of the most critical decisions you’ll make during this process, and it’s important to select someone who shares your vision and values while possessing the skills to lead.

While you may be inclined to pass the family business on to a family member (like a child or grandchild), it’s important to consider their interests in taking on the family business and experience.

If you do wish to keep the business in the family, keep in mind you’ll want to work with your successor and an advisor to determine how you’ll leverage the family business to help address your income needs in retirement.

Gifting vs. selling: Business owners tend to rely on the sale of their business to fund their future retirement – though if the business is staying in the family, a sale may not always happen. Rather, some choose to gift the business to the next generation, in which case you may not be entitled to any further income from the business (unless you’re hired as an employee).

Say for one reason or another, you don’t have someone ready to take the reins and keep the business in the family. Your successor can certainly fall outside the family as well. External candidates can include a trusted employee (or group of employees), a professional peer or even a competitor who may be interested in an acquisition opportunity. In those cases, you would likely pursue a sale.

Depending on the terms of the sale, you may have to cut ties completely with the company once upon transition. Though, in some cases, a successor may ask you to stay as a consultant, board member or advisor for a period.

Once you’ve identified a potential successor, it may take some time and in-depth conversations to gauge their interest, commitment and aptitude. If they feel like the right fit and accept your offer, your next step is to develop a comprehensive training plan.

This might include:

● Having the individual shadow your role to better understand day-to-day responsibilities (especially if they aren’t currently active in the business).

● Pursuing certifications or education relevant to the industry.

● Gaining additional experience in relevant areas such as financial management, operations or client relations.

When you invest your time into adequately preparing your successor, you demonstrate your confidence in their ability to lead the business through future endeavors and challenges successfully.

Step 3: Plan for the transfer of ownership

Ownership transfer is one of the most intricate aspects of succession planning. As you begin the planning process, you and your professional team will address important questions like:

● Should I sell my stake in the business entirely, or should I retain partial ownership?

● Should the transfer occur through a lump-sum payment or a structured buyout?

● What is the most tax-efficient way to execute the transfer?

To navigate these complex, yet critical considerations, you’ll need to find a business structure that complements your succession plan.

Some common types include:

Family Limited Partnership (FLP): This business structure can help you gradually transfer ownership to your heirs (like your children or grandchildren) while still retaining control over the business entity. Designed specifically for family businesses, an FLP would allow you to divide your company into general and limited partnership interests.

The general partner would maintain operational control, while your limited partners (usually your other family members) would receive ownership shares.

Limited Liability Company (LLC): This business structure combines the flexibility of a partnership with the liability protection of a corporation. As an owner, you are not personally liable for your business’s debts or liabilities, meaning your personal assets and financial well-being are protected. LLCs are fairly versatile and have fewer regulatory requirements than corporations, which can make them fairly straightforward to transition over to a new owner (at least from a legal standpoint).

Business trust: A business trust is a legal entity designed to hold and manage a company’s assets for the benefit of designated beneficiaries. By transferring ownership of the business to a trust, you can retain control of the business during your lifetime while specifying how the business should be managed and distributed after death. With a business trust, you also have the option to appoint trustees (like your successor) to oversee operations in your absence.

Aside from reassessing your business’s structure and entity type, use this period of planning to review all necessary legal documents as well. You and your business attorney may draft a buy-sell agreement, for example, that outlines the terms of the ownership transfer. Creating a clear, legally binding paper trail is critical to avoiding disputes and confusion in the future.

Throughout the succession planning process, you’ll want to work with an experienced team of professionals including a financial advisor, business advisor or consultant, attorney, tax professional and perhaps even a mediator or business coach. These professionals can help you weigh your options, understand the potential long-term ramifications of your decisions and ensure that your best interests remain protected.

Step 4: Start the transition

Transitioning a business should not feel like an overnight process, especially if you’d like your successor to help execute your long-term vision and mission for the company. Rather, a successful transition requires a gradual shift of responsibilities to ensure your successor is ready to lead effectively. If you’re able to, assign them small but meaningful tasks to start, and gradually increase their involvement over time.

Your successor can build confidence gradually while giving you the opportunity to oversee their progress. This approach also provides a safety net, allowing for adjustments before you fully step away.

Providing feedback regularly is essential. Create a timeline for achieving certain milestones and evaluate their performance against those benchmarks. Encourage open communication and dialogue, so your successor feels empowered to ask questions and take on larger responsibilities with your guidance to support them.

As this process begins, consider how you’ll introduce them to your clients, employees, vendors and partners. It’s important for your successor to establish these relationships fairly early on, so their role is taken seriously by others who work with or patronize the business after you’re gone.

Step 5: Monitor success and provide advice

If you’re handing the keys over to a family member or someone close, you may have the opportunity to stick around and serve as a mentor or guide after the transition is over. If you’re selling your company to a competitor or other third-party, however, your ability to stay involved after the sale is finalized may be limited.

Either way, your experience can be an invaluable resource for your successor as they navigate the business into a new era – while keeping your original vision and mission close to heart.

If you’re able and willing, it may help to set up some regular check-ins with your successor to discuss their progress and address any concerns (at least for the first few months or so).

That being said, your ongoing involvement after the transition should be strategic, clear and established with an end date in time. If you’ve retained partial ownership or an advisory role, be clear about your boundaries and responsibilities – after all, it’s in your best interest for your successor to confidently step into their leadership role.

The bottom line

Business owners at any stage need to consider what they want their legacy to look like and how to protect their company’s future (as well as their own financial well-being). By following the five succession planning steps above, you can lay the foundation for making a smooth transition from hardworking business owner to relaxed and financially confident retiree.  

At Conway Wealth, we understand the complexities of succession planning and the importance of getting it right. Our experienced team can guide you through every step of the planning process, offering personalized strategies to help you achieve your goals and preserve your business’s legacy for many years to come.

Whether you’re just starting to think about a succession plan or you’re ready to finalize the details, we’re here to help. Contact us today to learn how we can support you during this exciting transition. Reach out directly to the Conway Wealth team by emailing info@conwaywealthgroup.com or calling 973.285.3640.

Investment advisory and financial planning services offered through Summit Financial, LLC, an SEC Registered Investment Adviser, doing business as Conway Wealth Group (4 Campus Drive, Parsippany NJ 07054. Tel. 973-285-3600). 7443895.1