To implement a successful business succession plan, create a team of trusted advisors.
To implement a successful business succession plan, create a team of trusted advisors.

Business Succession: 3 Steps to Get it Right

Planning for the future is invaluable, and an important way to protect your company is to determine the most appropriate exit strategy.

It’s never too early to plan your exit strategy. Unforeseen events, market changes or lifestyle changes, and major events can occur unexpectedly. For example, the pandemic affected many business owners’ succession plans and exit strategies.

Some business owners may not have any succession plan in place at all. Yet, implementing a succession plan is a crucial planning step and can set you up for a smooth exit while also protecting the financial interests of your company and family.

When creating your business succession plan, take a holistic approach that accounts for your business and personal goals and that meets the needs of your company and family.

Key takeaways

  • Succession planning enables you to leave your business in sound financial health and under trusted leadership.
  • Create a succession plan unique to your business’s needs that accounts for interpersonal dynamics.
  • Allow yourself twelve to eighteen months to implement your business succession plan.

Why Create a Business Succession Plan?

Business owners exit their companies for various reasons, such as retirement or new opportunities. There are also common triggering events that can cause an expected sale such as disagreement, divorce, or disability.

Business succession planning should ensure a smooth exit and incorporate strategies that will build a better foundation for the company, leading to stronger growth and business cohesion.

During the early stages of planning, consider all the options. Do you want to pass the business to a child or other family member? Is it time that a new partner takes over managing duties? Keep your options open.

A business succession plan should consider the future goals of the company.
A business succession plan should consider the future goals of the company.

Three Steps to Business Succession Planning

The purpose of business succession planning is to ensure the long-term continuity of the entity to which you have likely dedicated significant time, money, and brainpower. A succession plan not only preserves the current business but also protects its value.

Steps for creating a successful succession management plan
Steps for creating a successful succession management plan

Here’s how to create and implement a successful succession plan.

1. Identify a successor

Whether you plan to keep the business in the family and pass it down to the next generation or sell to a new external owner, the method of choosing a successor will depend on many factors.

Learn about potential successors below.

A. A co-owner

In a partnership, consider selling your business interests to your partner(s) through a buy-sell agreement.

  • How it works: Partnerships may maintain a buy-sell agreement, a mutual understanding that should one partner leave the business, the remaining partner(s) buy that person’s interest in the business.
  • Advantages: A buy-sell agreement ensures that control of the business remains with knowledgeable leadership. The agreement also clearly defines your interest’s value and provides for business continuity in the event of an unexpected departure from the company.
  • Disadvantages: Maintaining a buy-sell agreement requires a lot of available cash. Depending on the agreement’s terms, co-owner(s) must be able to buy your interest at any moment. This liquidity need leads many partnerships to purchase life or key person insurance policies.
B. An heir

Owners of closely-held businesses often choose children or other family members within the organization to take over.

  • How it works: Determine who will replace you, which may be more complicated in a business with multiple capable family members. If you have multiple children in the business, provide detailed instructions on how each will be compensated (if at all) and on the future leadership structure.
  • Advantages: Someone who shares your values and has earned your trust will help the business’s path forward. Because of your detailed instructions, you also retain a degree of control over the business’s future. Keeping the business within the family may also prove less expensive because there is no need to vet the successor in the same way as selling to an outside buyer.
  • Disadvantages: Choosing a successor among family members may prove difficult and emotionally draining. Many second-generation businesses struggle to survive the transition and those that do often change ownership anyway.
C. A key employee

For a business structure other than a partnership, consider whether a key employee is prepared to succeed you. Consult your organization chart to determine potential leaders.

  • How it works: Like selling a business interest to a partner, selling to a key employee occurs through a buy-sell agreement. The selected employee will purchase your business at an established date or upon death, disability, or another specified event.
  • Advantages: The selected key employee will have demonstrated a capacity to lead, grow your business, and develop future leaders. The right successor will also have earned the respect of your staff and prove more reliable than outside purchasers.
  • Disadvantages: A key employee may not have enough liquidity to purchase your business outright. One option is to provide seller financing, where you negotiate a loan with the key employer that likely involves a down payment and monthly or quarterly payments with or without interest.
D. An outside party

When selling to a business partner, family member, or key employee is not possible, the business community is another option. An entrepreneur or even competitor may have an interest in your business.

  • How it works: Determine your business’s value, which will change with market conditions. Prepare the business for sale by identifying a general manager, updating operating procedures, and reviewing your finances.
  • Advantages: Market conditions may warrant a sale price that delivers a windfall. Selling to an outside party may also be easier than other options considering your business. For example, demonstrating the viability of a turnkey operation will attract buyers interested in a stable investment.
  • Disadvantages: Selling to an outside party requires flexibility and patience. Your business may not have the value you anticipated or identifying a worthy buyer may prove difficult. Additionally, selling to the outside can be highly disruptive to a business and can be quite stressful and invasive. It is often difficult to ensure discretion within the organization and can force owners to address their exit with employees sooner than they may wish to.

2. Determine the business's worth

Once you’ve identified your ideal exit strategy, determine your business’s net worth. Value is perceived through the eye of the beholder. Different exit strategies will attract different buyers, each of which may be interested in a different facet of your business.

The real question, however, is to identify the type of plan you want, i.e. family transfer, ESOP, management buyout, sale to the outside. The type of exit should be considered, not the buyer itself, before determining value. The value may be tweaked depending on the type of transfer. For example, discounts may apply for a family transfer.

Other valuation considerations at a minimum include reviewed but preferably audited financial statements including:

  • Balance sheets
  • Revenue concentrations
  • Profit and loss
    • If you plan to sell to the outside, audited statements are necessary

3. Implement a transition plan and timeline

After identifying your desired exit type, collaborate with your leadership team to implement a transition plan and timeline.

After all, succession planning is not a one-person job. It takes a group of experts working collaboratively to do it best.

Your team may include:

  • Business attorney
  • Qualified accountant
  • Experienced exit advisor
  • Investment Banker/M&A Advisor
  • Lender
  • ESOP trustees

Depending on your chosen succession plan, you may need folks like ESOP trustees, M&A advisors, or even a family counselor.

Yellow Cardinal Advisory Group Can Help Design and Implement Your Plan

A successful business succession plan is executed with intention and purpose to ensure the continuation of the business into future generations. A productive plan enables your business to continue operations during a disruptive process.

An external analyst with financial expertise can prove critical. At Yellow Cardinal Advisory Group, we have the specialized knowledge and unbiased view you need to evaluate your options and determine which succession plans are viable for your company.

Yellow Cardinal Advisory Group offers business succession planning services. Contact us to get started.

Keys to Succession Planning graphic: Adapted from "What is Succession Planning? Key Strategies and Benefits," by Zachary Totah, SelectHub;

Creating a Succession Management Plan graphic: Adapted from "Succession Management: 9 Steps For Future Success," by Shani Jay, Academy to Innovate HR;

The information on this page is accurate as of June 2022 and is subject to change. First Financial Bank and Yellow Cardinal Advisory Group are not affiliated with any third-parties or third-party websites mentioned above. Any reference to any person, organization, activity, product, and/or service does not constitute or imply an endorsement. By clicking on a third-party link, you acknowledge you are leaving First Financial Bank and Yellow Cardinal Advisory Group are not responsible for the content or security of any linked web page.


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