Succession Planning Can Pay Big Dividends
January 16, 2014
What Will Happen to Your Business When You Step Aside?
Succession planning usually isn’t high on the list of things most business
owners like to think about. After all, many owners have spent much of their
lives building their companies, which makes it hard to envision somebody else
running the show.
But failing to plan for business succession can result in numerous problems
down the road — not only for you personally, but for your company, employees,
partners, family and heirs. Conversely, having a well-thought-out succession
plan in place — well in advance of your planned departure from the company — can
pay big dividends for all of your business stakeholders.
Two Phases of Succession Planning
The goal of business succession planning is to determine how ownership of
your company will be transferred to others when the time comes for you to step
aside. This primarily involves two distinct phases of planning:
1. Passing business ownership and management responsibility on to others.
2. Monetizing the wealth embedded in your company to meet your own personal
financial needs; i.e., cashing out. This cash may represent your main source
of retirement income, or you might use it to start or buy another business.
What do you want to happen to your business when you leave? Do you desire for
the business to continue as a going concern under new leadership? If so, who
will constitute the next generation of leaders? Is yours a family business that
you’d like to keep in the family after you leave, or do you plan to sell the
company to an outside buyer, whether a strategic or complimentary buyer or a
private equity firm?
Ownership and Management Succession
The next step is to break the succession planning process into two broad
categories: ownership succession and management succession. Ownership succession
refers to the transfer of business ownership, as noted above, while management
succession refers to the transfer of management responsibilities to new
Since the primary value in many businesses lies in the owner’s relationships
with clients and vendors, there needs to be a structured plan and process for
transitioning these relationships to the new owners and leaders. Many business
acquisitions break down because no one took the time to plan for a smooth
transition of these critical relationships.
Meanwhile, key managers and executives should be identified who will be
critical to the transition to new ownership, and they should be brought into the
planning process early on. These key employees will be vital to making your
succession plan work, so it’s important to get their buy-in. In some instances,
it might be worthwhile to offer them an equity stake in the company in exchange
for their commitment to stay on board.
Here are a few more considerations as you begin the process of business
- If yours is a family business, talk openly and honestly about succession
planning with all family members. Find out who might want to be involved in the
next generation of leadership and what their roles might be. The logistics of
family members’ ongoing involvement in the business need to be coordinated with
the expectations and goals of key non-family employees.
- Don’t hesitate to seek input from succession planning advisors and experts
outside your firm. These professionals can offer objective insights and advice
from an outsider’s perspective, which can be extremely valuable.
- From a timing perspective, it’s really never too early to start succession
planning. Many experts say that serious planning should start no later than five
years before your planned departure from the business. This will help ensure a
smooth transition to new ownership and management, as well as give you ample
time to plan for how to maximize your personal financial return.
succession planning with a City National Bank expert, give us a call at
(800) 773-7100 or
Contact Us request that a Relationship Manager contact you.