Broker Check
Building a Business Succession Plan from Vision to Transition

Building a Business Succession Plan from Vision to Transition

December 06, 2023

Succession planning can be daunting for the business owners that we help. It involves critical decision-making and unbiased strategic thinking, which can be difficult when you've poured your heart and soul into building your business. For many, the company represents not just financial investment but a lifetime of work and dedication.

That's why it's essential to approach it sooner than later, with clarity.

The beauty of succession planning is that it's not just about retirement or selling your business. It's about making your business more resilient. Often, the process of planning for the future can uncover areas for improvement, making your business stronger in the present. So, even if stepping away isn't on your near-term horizon, having a succession plan in place ensures that your business can thrive, regardless of what the future holds.

Essential Questions to Shape Your Plan
To ensure that your succession plan is in sync with you and your company’s long-term goals, start by reflecting on these questions:

  • What are your company's overarching goals, and how will your succession plan advance them?
  • How do the expected financial outcomes of the business sale align with your personal financial needs?
  • Who is poised to take over, and what development will they require?
  • Are the competencies of potential leaders within your organization identified?
  • What tax consequences will your plan incur, and how can you mitigate these? 

Having a clear vision of your end goals and challenges is fundamental to evaluating your current state, choosing successors, and formulating a strategy that aligns with both your personal and business aspirations while minimizing tax liabilities.

Deciding on the Next Leader
Determine whether the next owner will be an internal business operator or an external one, possibly with a separate management team. This choice is deeply personal and contingent on your unique situation. Perhaps a family member is ready and able to carry on the business, potentially in an ownership role without day-to-day management, or maybe a key employee is prepared to step into leadership.

Timing and Transition
For the most effective transition, begin the process several years before you plan to step down. This foresight allows for a smoother transition and allows you to prioritize the qualities and capabilities your successor will need.

Navigating Tax Considerations
Understanding the tax ramifications of different exit strategies, such as selling your business versus passing it on can be overwhelming, but essential. For example:

  • Selling the business: Grasping the difference between asset and stock sales and their respective tax implications. Consider capital gains, depreciation recapture, and potential double taxation.
  • Family succession or employee ownership: Familiarize yourself with gift and estate tax rules, understand the tax basis implications, and consider both federal and state taxes.

A CPA and financial advisor will be key in helping you navigate through the complexities.

Prepping for Sale
If selling is your choice, you’ll need to get a valuation and make your business appealing to prospective buyers. This includes:

  • Showcase strong financial performance and growth potential.
  • Have a clear business plan with solid financial projections.
  • Ensure professional management and a thorough understanding of the market.
  • Cultivate a diversified customer base and documented processes.
  • Reduce owner dependence, maintaining positive cash flow and sales trends.
  • Build a strong reputation and client base.

Avoiding Common Mistakes
There are common missteps in succession planning that you will want to steer clear of:

  1. Over-focusing on planning to the detriment of current business health.
  2. Procrastinating on starting the planning process.
  3. Holding unrealistic expectations about timelines and successor readiness.

This type of planning can take years to bear fruit, so it’s best to start sooner rather than later. Engage with your advisors—accountant, lawyer, and financial advisor—to craft a practical, achievable, and seamless succession plan.

After all, I've found that strategic succession planning gives business owners peace of mind for their future and makes for a stronger business in the near term. It can boost profitability and broaden your team's skill set. This process also prepares your business for future transitions, whether it's transferring ownership to family, selling to your team, or dealing with external buyers.

Focused on long-term goals, careful planning lays a strong foundation for a seamless transition, helping your business thrive now and in the future. Contact us at Wealthspring to get started today.