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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 leadership.

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 succession planning:

  • 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.

To discuss 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.