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How to Create a Business Succession Plan

For many small business owners, maintaining positive cash flow and a stable balance sheet can be an ongoing battle that consumes virtually all of their time. Even retirement often seems like a distant speck on the horizon, let alone plans to hand over the business. However, establishing a sound business succession plan is beneficial for most business owners and can be absolutely necessary for some.

For business owners that are at or near retirement, the issue of succession cannot be ignored. In this article, we will take you through the steps you'll want to take to create a successful succession plan.

Picking a Successor Isn't Easy

Many factors determine whether a succession plan is necessary, and sometimes the logical and easy choice will be to sell the business lock, stock, and barrel simply. However, many owners prefer the thought of their businesses continuing on even after they're gone.

Choosing a successor can be as easy as appointing a family member or assistant to take the owner's place. However, there may be several partners or family members from which the owner will have to choose — each with a number of strengths and weaknesses to be considered. In this case, a lasting resentment by those who were not chosen may happen, regardless of what choice is ultimately made. Partners who do not need or want a successor may simply sell their portion of the business to the other partners of the business in a buy-sell agreement .

How Much Is the Business Worth?

When business owners decide to cash-out (or if death makes the decision for them), a set dollar value for the business needs to be determined, or at least the exiting share of it. This can be done either through an appraisal by a certified public accountant (CPA) or by an arbitrary agreement between all partners involved. If the portion of the company consists solely of shares of publicly-traded stock, then the valuation of the owner's interest will be determined by the stock's current market value.

Life Insurance: The Standard Transfer Vehicle

Once a set dollar value has been determined, life insurance is purchased on all partners in the business. In the event that a partner passes on before ending his relationship with their partners, the death benefit proceeds will then be used to buy out the deceased partner's share of the business and distribute it equally among the remaining partners.

There are two basic arrangements used for this. They are known as "cross-purchase agreements" and "entity-purchase agreements." While both ultimately serve the same purpose, they are used in different situations.

Cross-Purchase Agreements

These agreements are structured so that each partner buys and owns a policy on each of the other partners in the business. Each partner functions as both owner and beneficiary on the same policy, with each other partner being the insured. Therefore, when one partner dies, the face value of each policy on the deceased partner is paid out to the remaining partners, who will then use the policy proceeds to buy the deceased partner's share of the business at a previously agreed-upon price.

As an example, imagine that there are three partners who each own equal shares of a business worth $3 million, so each partner's share is valued at $1 million. The partners want to ensure that the business is passed on smoothly if one of them dies, so they enter into a cross-purchase agreement. The agreement requires that each partner take out a $500,000 policy on each of the other two partners. This way, when one of the partners dies, the other two partners will each be paid $500,000, which they must use to buy out the deceased partner's share of the business.

Entity-Purchase Agreements

The obvious limitation here is that, for a business with a large number of partners (five to ten partners or more), it becomes impractical for each partner to maintain separate policies on each of the others. There can also be substantial inequity between partners in terms of underwriting and, as a result, the cost of each policy.

There can even be problems when there are only two partners. Let's say one partner is 35 years old, and the other is 60 years old — there will be a huge disparity between the respective costs of the policies. In this instance, an entity-purchase agreement is often used instead.

The entity-purchase arrangement is much less complicated. In this type of agreement, the business itself purchases a single policy on each partner and becomes both the policy owner and beneficiary. Upon the death of any partner or owner, the business will use the policy proceeds to purchase the deceased person's share of the business accordingly. The cost of each policy is generally deductible for the business, and the business also "eats" all costs and underwrites the equity between partners.

3 Reasons to Have a Business Succession Plan

Creating and implementing a sound succession plan will provide several benefits to owners and partners:

• It ensures an agreeable price for a partner's share of the business and eliminates the need for valuation upon death because the insured agreed to the price beforehand.
• The policy benefits will be immediately available to pay for the deceased's share of the business, with no liquidity or time constraints. This effectively prevents the possibility of an external takeover due to cash flow problems or the need to sell the business or other assets to cover the cost of the deceased's interest.
• A succession plan can greatly help in establishing a timely settlement of the deceased's estate .

The Bottom Line

Proper business succession planning requires careful preparation. Business owners seeking a smooth and equitable transition of their interests should seek a competent, experienced advisor to assist them in this business decision.

American Bar Association. " Forms of Stock Purchase Agreements ," Page 1.

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leadership development

A Guide to Building the Best Succession Plans (+ Examples)

Dive into a detailed succession plan example & learn how to cultivate future leaders. Get tips & tools for smooth transitions & sustained growth.

Matthew Reeves

CEO of Together

Published on 

February 6, 2024

Updated on 

Time to Read

mins read time

Picture this: your CEO announces their retirement. The board scrambles to find a suitable replacement. Morale dips. Uncertainty hangs heavy in the air. Sound familiar? 

It's an all-too-common scenario of unplanned leadership transitions, a recipe for disruption and lost momentum. In fact, 49% of companies worldwide lack a formal succession plan, leaving them vulnerable to talent gaps and costly instability.

But it doesn't have to be this way. 

Succession planning isn't a luxury, it's a strategic lifeline. It's identifying and nurturing your future leaders, not before the storm, but while the sun shines. It's ensuring a smooth handover of the baton, preserving institutional knowledge, and guaranteeing your organization's continued growth—even when the inevitable winds of change blow.

Ready to break free from the reactive dance of unplanned transitions? Let's explore the power of succession planning and uncover the tools to build a future-proof leadership pipeline . 

Understanding what succession planning is

Ever heard of a company built like a house of cards? One key departure, and the whole thing crumbles. That's the scenario succession planning aims to prevent.

Simply put, succession planning is building the bridge between your present leadership and a vibrant future. It's identifying and nurturing talent – your high-potential stars – to seamlessly step into critical roles when the time comes. Think of it as inoculating your organization against talent shock.

Why is this so crucial? Consider this:

• Deloitte reports 86% of leaders believe succession planning is an "urgent" and "important" priority, yet only 13% believe they do it well.
• Firing a CEO, without a succession plan in place, costs companies an average of $1.8 billion in shareholder value, whether the new CEO is from inside or outside the company.
• McKinsey research reveals that unsuccessful leadership transitions lead to 20% lower employee engagement and 15% lower team performance.

Think of a well-executed succession plan as your secret weapon:

• It fosters organizational stability and smooth transitions, safeguarding against knowledge gaps and disruption.
• It attracts and retains top talent, who see clear pathways for growth and development within the company.
• It cultivates a culture of learning and continuous improvement, empowering your future leaders to excel.
• It boosts employee engagement and morale, knowing the organization invests in their long-term potential.

In a nutshell, succession planning isn't just about filling empty chairs; it's about building a thriving legacy. It's the insurance that your organization not only survives, but thrives, even as the leadership baton passes to the next generation.

Ready to learn how to craft your own winning succession plan? Buckle up, the next section explores the essential ingredients for success!

🛤️ Also read our Guide on The 4 Stages of Succession Planning

9 key elements of an effective succession plan.

A common misconception around succession planning is that it's simply a wish list – a hopeful glance toward the future with little substance or strategy. But in reality, it's far more than that. It's a meticulously crafted roadmap that guides an organization through the inevitable twists and turns in its leadership journey.

So, where do you begin in crafting this vital roadmap? 

The answer lies in breaking down the essential components that make it truly effective. Imagine these components as individual building blocks, each carefully chosen and strategically placed to form a sturdy and reliable path toward a thriving future. 

Let's delve into these critical elements, dissecting their roles and exploring the tools and strategies you can employ to ensure your succession plan isn't just a pipe dream, but a tangible bridge to a prosperous tomorrow.

1. Identification of key roles

In a successful succession plan , identifying key roles is crucial. This isn't about randomly selecting positions to fill; it's about discerning the very engines that drive your organizational ship, the positions that hold the greatest influence and impact. It requires critical thinking and strategic foresight, looking beyond the immediate present and anticipating future needs and growth areas. 

For instance, if you're a tech company, your lead software developer or project manager may be key roles. Identify these roles early on to ensure a smooth transition when changes occur.

2. Talent assessment

Once you have identified the key roles, the next step is talent assessment , the delicate yet crucial task of discovering the hidden gems within your talent pool. 

Think beyond resumes and experience – look for hidden gems with the right blend of skill, potential, and leadership qualities. Think diverse perspectives and fresh ideas that can fuel innovation and growth.

3. Communication strategy

Next, we build the superstructure of communication and development . Transparency is key – keep your crew informed about the plan and their potential role within it. Hold regular meetings, create informative materials, and foster an open dialogue to build trust and engagement , while celebrating milestones along the way to motivate and inspire. 

4. Leadership development

Imagine a seasoned leader stepping down, leaving behind a vacuum that cripples your organization. Leadership development equips potential successors with the skills, confidence, and experience to step into those shoes with minimal disruption.  

So, how can you invest in leadership development ? The options are varied and adaptable:

• Tailored training programs - Design programs that cater to individual strengths, weaknesses, and leadership styles.
• Stretch assignments - Challenge individuals with projects outside their comfort zone to push their boundaries and unlock hidden potential.
• Conferences and workshops - Provide access to external knowledge and networking opportunities to broaden perspectives and learn from industry experts.
• Leadership rotations - Give individuals exposure to different departments and functions to develop a holistic understanding of the organization.

5. Mentorship programs

Mentorship programs are a vital ingredient in any robust succession plan. They bridge the gap between experienced leaders and emerging stars, weaving threads of knowledge, wisdom, and practical experience to prepare the next generation for success.

The power of mentorship isn't just anecdotal. It's more than just learning the ropes; it's a knowledge-sharing ecosystem where seasoned veterans impart their hard-won insights, helping rising stars navigate the complexities of leadership, build confidence, and refine their skills.

6. Emergency succession plan

No matter how meticulous your planning is, the future can hold surprises. Sudden leadership departures or unforeseen circumstances can disrupt even the most stable organizations. That's why every robust succession plan needs a safety net: a comprehensive Emergency Succession Plan ready to be activated at a moment's notice.

Think of it like a fire drill for your organization. Just as you regularly practice for an emergency evacuation, the Emergency Succession Plan outlines the immediate steps and responsible individuals in case of critical leadership disruptions. This ensures a swift and decisive response, minimizing chaos and keeping the organization on track even amidst turbulence.

Regularly review and update your emergency plan to reflect personnel changes, organizational shifts, and evolving risks. Conduct simulations to identify potential gaps and refine your response mechanisms. 

7. Succession planning committee

A comprehensive succession plan isn't just about identifying future leaders and offering training; it requires careful execution and oversight. That's where the Succession Planning Committee steps in, acting as the driving force behind the plan's implementation and success.

Here's how this committee fuels your succession plan's success:

• Gathering diverse perspectives - The committee isn't a one-man show; it's a melting pot of knowledge and experience. Including representatives from HR, senior leadership, and even key stakeholders ensures you're not missing any crucial angles. 
• Avoiding bias and blind spots - We're all human, which means we have our own biases and blind spots. A well-structured committee helps mitigate these risks, ensuring a fair and objective approach to talent selection and development.
• Building trust and transparency - The committee acts as a bridge between leadership, HR, and the wider organization, fostering transparency throughout the process. This helps build trust among employees, who feel their voices are heard and that the selection process is fair and well-considered.

8. Integration with performance management 

Think of performance management and succession planning as two sides of the same coin. By integrating them, you create a powerful engine for talent development, ensuring a smooth transition of leadership and building a future-proof organization that thrives on its people's potential.

Here’s how you can do this:

• Align development with goals - Use performance reviews to identify strengths and weaknesses of potential successors, aligning their development plans with the specific skills and knowledge needed for future leadership roles. This way, you're not just giving them generic training; you're providing targeted development that directly contributes to your succession plan's success.
• Go beyond annual check-ins - Foster a culture of ongoing feedback and development where managers and mentors regularly provide constructive criticism and guidance. This continuous feedback loop helps individuals stay on track, identify areas for improvement, and build the confidence needed to step into leadership roles.
• Track progress and make adjustments - Use performance management data to track the development of potential successors, assess the effectiveness of your training programs, and identify any gaps that need to be addressed. This ongoing monitoring allows you to adjust your plan as needed, ensuring it remains relevant and effective in the ever-changing business landscape.

9. Regular review and update

Just like your organization adapts and grows over time, your succession plan needs to be a living document, constantly evolving to stay relevant. Regular review and updates are crucial to ensure you have the right leaders ready to step in whenever needed.

Here's how you can embrace continuous improvement in your succession planning:

• Regular reviews - Schedule frequent reviews, ideally annually or even bi-annually, to assess your plan’s effectiveness and identify areas for improvement.
• Data-driven decisions - Gather feedback from employees, stakeholders, and leadership teams to understand their perspectives and concerns. Use performance data and industry trends to inform your decisions about changes and updates.
• Talent pool refreshment - Regularly assess your pool of potential successors and identify new individuals who possess the skills and qualities needed for future leadership roles. Don't rely on the same shortlist year after year.

Remember, a dynamic and adaptable succession plan is an investment in your organization's long-term success. By prioritizing continuous improvement, you ensure you have a pipeline of talented individuals ready to lead when the time comes, navigated by a plan that reflects your evolving needs and keeps you ahead of the curve. 

Succession plan example 

Now that we've explored the key components and principles of effective succession planning, let's put theory into practice. We'll walk you through a succession plan example for a fictional company, highlighting how these elements come together in real-world situations. 

Remember, this is just a jumping-off point, adapt and customize it to fit the specific needs and structure of your organization. 

1. Succession plan overview

• Ensure continuity of leadership and knowledge transfer in key roles to maintain business growth and sustainability.
• Protect the organization from disruptions caused by unexpected departures.
• Develops a pipeline of talented leaders for future growth.
• Motivates employees by providing career development opportunities .

2. Key Positions

• CEO (responsible for overall strategy and vision)
• Head of Operations (looks after production and supply chain)
• Head of Sales and Marketing (drives customer acquisition and revenue growth)
• Chief Technology Officer (leads innovation and technology development)

3. Talent Assessment

GreenGrow Gardens employs a three-pronged approach to assess the potential for each key position:

Performance reviews

GreenGrow's performance reviews delve deeper, assessing qualities like communication, problem-solving, and collaboration. Employees at all levels, including peers, direct reports, and even clients, provide anonymous feedback on potential successors. This multi-dimensional, 360-degree feedback helps uncover hidden strengths and weaknesses often missed in traditional reviews.

Leadership potential assessments

Beyond resumes - GreenGrow utilizes validated leadership assessments to measure cognitive abilities, emotional intelligence, strategic thinking, and adaptability.

Customized profiles - GreenGrow uses customized profiles to tailor development programs and mentorship opportunities to maximize each potential leader's growth potential.

Example in action 

Assessing Jessica Davis for Head of Sales and Marketing

Performance review - Jessica consistently surpassed sales targets while fostering a positive and collaborative team environment. Her innovative marketing campaigns have gained national recognition, showcasing her strategic thinking and creativity.

360-degree feedback - Jessica received high praise for her communication skills, ability to motivate others, and willingness to mentor junior team members. Clients commended her customer focus and understanding of their needs.

Leadership potential assessment - Jessica's assessment revealed strong analytical skills, strategic thinking, and a high score in adaptability. However, it also highlighted a potential tendency to micromanage.

Based on this multifaceted assessment, GreenGrow identifies Jessica as a strong candidate for Head of Sales and Marketing. Her development plan will focus on empowering her team, delegating tasks effectively, and further honing her strategic leadership skills.

GreenGrow offers a range of tailored development programs to ensure that its future leaders have the skills, knowledge, and experience they need to thrive in their roles. Some examples include:

• Mentorship pairings with senior leaders
• Executive coaching
• Leadership training courses
• Stretch assignments to test readiness for higher-level roles

Example in action

Development plan for Jessica

• Executive coaching to enhance strategic thinking and decision-making.
• Leadership training program focused on effective team management and conflict resolution.
• Participation in industry conferences and networking events.
• Lead a cross-functional project to launch a new product line, demonstrating the ability to drive innovation and collaboration.

5. Communication strategy

GreenGrow Gardens believes that transparency and trust are essential for a successful succession plan. Here's how they communicate openly with employees and stakeholders:

1. Unveiling the roadmap

• Town hall meetings - Mr. Thompson, the CEO, holds regular town hall meetings where he openly discusses the succession plan, its purpose, and the benefits for both employees and the company.
• Internal newsletter - A dedicated section in the company newsletter features updates on the progress of the plan, highlighting individuals like Jessica Davis and their development journey.

2. Tailoring the message

• Management training - Senior managers are trained on effectively communicating the plan to their teams, addressing potential concerns and anxieties with clarity and empathy.
• Stakeholder briefings - Mr. Thompson personally meets with key stakeholders, including investors and board members, to explain the plan's details and rationale, addressing their specific interests and concerns. 

3. Fostering engagement

• Interactive Q&A sessions - Following announcements, GreenGrow offers dedicated Q&A sessions where employees and stakeholders can raise questions and receive clear answers. 
• Internal social media platform - A dedicated forum on the company's internal social media platform allows employees to discuss the plan, share feedback, and offer suggestions.

4. Celebrating milestones

• Internal recognition - As individuals like Jessica Davis progress through their development programs and achieve milestones, GreenGrow celebrates their successes through company-wide announcements and internal awards.
• Success stories - The company newsletter and internal communications channels regularly feature success stories of individuals who have benefited from the succession plan, showcasing how it empowers employees to grow and reach their full potential. 

6. Succession timeline

GreenGrow Gardens understands that a clear and realistic timeline is key to a successful succession plan. Here's how they define their roadmap for Jessica Davis' potential transition to Head of Sales and Marketing:

Year 1: Building the Foundation

Year 2: Refining and Preparing ‍

This timeline is a dynamic roadmap, subject to adjustments based on Jessica's development, business needs, and unexpected circumstances. 

7. Contingency planning

GreenGrow Gardens recognizes that surprises can strike. To ensure seamless operations even in the face of unexpected departures or disruptions, they have a robust contingency plan in place. This plan includes:

• Temporary assignments - Key responsibilities can be temporarily redistributed among senior team members while a more permanent solution is found.
• External recruitment - If internal talent isn't readily available, GreenGrow explores external recruitment options to fill essential roles quickly.
• Internal promotions - When possible, qualified internal candidates are considered for promotions, offering career advancement opportunities and minimizing disruption.

8. Monitoring and evaluation

GreenGrow Gardens understands that continuous monitoring and evaluation are crucial for a future-proof succession plan. Here’s how the company keeps a watchful eye on its succession plan.

• Progress checks - Development programs and talent readiness are regularly assessed, ensuring individuals stay on track and the plan remains relevant.
• Adaptive approach - The plan isn't set in stone. Adjustments are made based on progress, feedback, and evolving business needs.

9. Documentation and knowledge transfer

GreenGrow Gardens knows that effective knowledge transfer is a continuous process, not a one-time event. The company cultivates a culture of learning , collaboration, and wisdom sharing by following these diverse strategies:

• Detailed job profiles - Beyond responsibilities, each key position has a comprehensive profile outlining crucial skills, decision-making frameworks, and industry best practices.
• Process playbooks - Every critical operational and marketing process is meticulously documented, step-by-step, with flowcharts and visuals for clarity.
• Wisdom vault - GreenGrow Gardens has established a centralized repository of essential documents, historical reports, and even video recordings of seasoned leaders sharing their insights. This "wisdom vault" is accessible to all, fostering a culture of learning and preserving valuable knowledge for future generations.
• Shadowing - High-potential individuals like Jessica Davis shadow mentors like Mr. Thompson, observing their daily routines, decision-making processes, and client interactions. This firsthand experience provides invaluable insights and builds confidence for future leadership roles.
• Cross-pollination through teams - Cross-training programs break down departmental barriers, allowing individuals to gain firsthand experience from colleagues in other functions. 
• Mentorship circles - Experienced leaders like Mr. Thompson act as mentors, guiding and supporting potential successors through personalized advice, problem-solving sessions, and regular feedback.
• Internal knowledge portal - GreenGrow has developed a user-friendly online platform where employees can access documented knowledge, share best practices, and learn from each other. 

This is a hypothetical succession plan example, and a real succession plan would include more specific details and timelines for each element.

HR's role in succession planning

Succession planning isn't just about filling chairs when leaders move on; it's about strategically cultivating future talent and ensuring seamless transitions for ongoing success. In this crucial endeavor, HR emerges as the architect, playing a multi-faceted role in designing and implementing robust succession plans.

HR wears many hats in this process:

• Talent scout - They identify high-potential individuals across the organization, assessing skills, leadership qualities, and potential through performance reviews, assessments, and even 360-degree feedback.
• Development facilitator - HR collaborates with leadership teams to tailor development programs for potential successors, including mentorship pairings , executive coaching, and leadership training courses.
• Process architect - They work with leaders to define key roles, document responsibilities, and establish clear talent pipelines for various positions, ensuring a smooth flow of talent as needs evolve.
• Communication champion - HR ensures open communication throughout the process, informing employees and stakeholders about the purpose, benefits, and timeline of the succession plan, fostering trust and engagement.
• Change navigator - When unexpected challenges arise, HR helps navigate disruptions and adapt the plan accordingly, ensuring continuity and minimizing uncertainty.

For a truly successful succession plan, collaboration between HR and leadership teams is paramount. Here's how they can work together:

• Leadership buy-in - HR educates leaders on the importance of succession planning, securing their commitment and active participation. This ensures the plan receives the resources and support it needs to thrive.
• Strategic alignment - HR collaborates with leadership to define the organization's future direction and identify the skills and qualities needed for future leaders. This alignment ensures the plan develops leaders who are equipped to navigate the company's future challenges and opportunities.
• Leadership development - HR partners with leaders in designing and delivering leadership development programs. Leaders can share their own experiences and insights, while HR provides expertise in training methodologies and program evaluation.
• Mentorship matching - HR facilitates the matching of potential successors with experienced mentors within the organization, leveraging the wisdom and guidance of current leaders to nurture the next generation.

By proactively embracing their role and fostering strong collaboration, HR can ensure that succession planning is not just a box-ticking exercise, but a strategic investment in the future of the organization. By nurturing a pipeline of well-prepared leaders, HR empowers companies to navigate change, overcome challenges, and secure their ongoing success.

Securing your organization’s future with Together

While the daily grind of operations might keep succession planning on the back burner, its importance cannot be overstated. It's not just about filling empty chairs, it's about cultivating future-proof leaders who drive sustainable growth and navigate the ever-evolving business landscape.

Consider the tangible benefits: smoother transitions, minimized disruption, talent retention , and even a competitive edge when attracting top talent. The example we explored, GreenGrow Gardens, showcased how a well-designed plan fosters employee engagement, nurtures future leaders, and ultimately secures the company's continued growth.

But building an effective plan takes more than good intentions. It requires dedicated resources, expertise, and efficient tools to manage and optimize the process. This is where Together, a powerful mentoring platform, enters the picture.

Together streamlines every step of your succession planning journey:

• Talent identification - Utilize data-driven insights and assessments to identify and track high-potential individuals across your organization.
• Development roadmap - Design personalized development plans, match mentors with successors, and track progress through intuitive dashboards.
• Knowledge transfer - Facilitate seamless knowledge sharing through structured mentorship programs and collaborative tools.
• Communication and visibility - Keep everyone informed with built-in communication features and transparent progress reports.

Embrace the future, invest in your talent, and unlock the full potential of your organization. Take the first step by exploring Together : a platform designed to empower your HR team, engage your employees, and cultivate the future leaders who will take your organization to new heights.

Book a demo today and learn how Together can transform your succession planning into a powerful engine for sustained growth and a vibrant future.

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Every business needs a succession plan: Here's how to get started

A business succession plan helps ensure that your wishes are followed once you can no longer take care of your enterprise. Follow these steps to make sure you have the best plan possible in place.

Find out more about getting legal help

by   Michelle Kaminsky, Esq.

Writer and editor Michelle earned a Juris Doctor (J.D.) degree from Temple University's Beasley School of Law in...

Read more...

Updated on: November 1, 2023 · 4 min read

1. Decide on your goals

2. choose your successor, 3. work together on future goals, 4. ask for help.

If you want to be sure that your business continues to thrive after your retirement, illness, or death, now is the perfect time to begin drawing up a succession plan. Think of this document as being similar to doing estate planning for yourself, with the difference being that a succession plan ensures that your enterprise will experience as seamless a transition as possible once you are no longer able to manage it.

With a proper business succession plan in place, you can handpick the person or company who will take over your business and make sure they are well equipped to handle matters right out of the gate. Moreover, if your business changes hands because of your death, having your share of the business already appraised means your estate can be settled more quickly—a benefit for both your business and your loved ones.

There is no one correct way to write a business succession plan. In fact, you have several options regarding what will happen to your enterprise when you're no longer running it. You may choose to sell it outright in return for cash or assets, transfer your interest to a trust or annuity before your death, or establish a partnership with family members, to which you can then transfer the business. All of these options are complicated legal maneuvers for which professional advice is recommended.

If you have decided to pass the business on to someone else, however, there are some general steps you can follow as you develop the succession plan.

When starting to plan for the future of your business without you, it is important to zero in on your view for what it should look like. Do you want your business to stay predominantly like it is or do you want whomever takes over to have the freedom to expand it as they see fit?

Another important question to address is whether you plan on handing over the business at retirement or whether your plan is largely geared toward a change of hands because of your incapacitation or death. If you are planning on retiring, it is also important to incorporate some retirement planning into your goals, particularly regarding the time frame.

Once you have a general idea of what you want for your business, your choice of successor will probably become clearer. Perhaps because of your specific goals or because you don't have someone in mind to take over, you may decide to have a different company take over your business. In this case, you should research the best company to fit your needs and desires for the future of your enterprise, knowing that you may not have too much control after you cede the reins.

On the other hand, searching for an individual to take over requires considering many more personal qualities. Of course you want a reliable and responsible individual with strong leadership skills, but it can be difficult to separate emotions from more practical considerations, especially when close family members are involved. If this could be an issue, you should strongly consider reviewing outside consultants to help decide what's best for you.

Once you have chosen a successor, together you can devise future strategies for your business. You should identify your successor's primary duties and then conduct a training period so they can be exposed to those areas.

Keep in mind that because this person is going to be in charge someday, giving them increased responsibilities now can not only help you see how they would handle certain situations but also help instill confidence that they will be ready to do it all on their own in the future. To better ensure you've made the right choice, you may wish this training period to last for an extended period of time before you give up control entirely.

There's no question that establishing a business succession plan is a serious undertaking, so seeking professional advice—especially regarding drawing up legal agreements, such as a buy/sell contract —is highly recommended. A proper business succession plan has all of the necessary legal documents prepared and ready for execution whenever it needs to be put into effect, whether it's by choice or by circumstance.

Remember, too, that, just as you should with estate planning documents, you must make sure your business succession plan is always up to date. If life events such as births, deaths, marriages, or divorces would impact your plan, it's time to revisit it and make sure it's still what you want.

Overall, developing a succession plan for your business now, while your enterprise is in a good, solid place, means you can take your time and make informed decisions. Once you have decided on your successor and have a clear path to having them take over, you can rest easier knowing that all of your hard work building your business won't simply fall by the wayside once you're gone—and that kind of peace of mind is priceless.

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Home » Human Resources » Business succession planning: The complete guide

Business succession planning: The complete guide

Business succession planning (BSP) is the best way for HR to ensure they retain the institutional knowledge and experience they have worked hard to accumulate in a business. 

It also helps ensure your enterprise’s survival in an age where HR focusing on employee retention   and quality talent is vital to business resilience .

BSP involves handing authority to lower levels of staff to avoid role gaps and ensure a successful transition for staff to leadership roles when companies lose employees through passing away, departing the company, or experiencing termination. 

40% of businesses fail within the first three years which can be due to a lack of succession planning or the fact that 42% of leaders rely on HR to carry out BSP rather than spreading the responsibility between all enterprise leaders.

However, effective business succession planning can benefit the culture, operations and finances of any enterprise. 

In this guide, we’ll explore:

What is business succession planning?

Why is business succession planning important, the 7 types of business succession planning, benefits of succession planning, barriers to business succession planning, how leaders and hr can achieve succession planning.

Succession planning in business involves strategically transferring leadership roles from one employee or a team to another and is often a care aspect of businesses owned by multiple owners.

This business strategy aims to maintain the seamless operation of a business, ensuring continuity even when key individuals transition to new opportunities, retire, or pass away. 

Additionally, it can facilitate a liquidity event, allowing the smooth transfer of ownership to emerging staff without impacting employee productivity while preserving the business’s ongoing viability.

Business succession planning is crucial for continuity and yet 43% of businesses do not have a BSP plan . These businesses are missing out on an approach which can ensure a smooth transition of leadership, preserve wealth, maintain employee morale, and safeguard the company’s legacy. 

Let’s go into more detail about why business succession is important to help you understand why it may benefit your organization.

Business resilience strengthening

Ensuring business resilience is paramount for sustained success, whether maintaining the current structure or navigating transitions like sales or restructuring, safeguarding assets for continual growth and prosperity.

Ensuring harmony between owners

In business partnerships, fostering harmony is essential. Balancing owner or CEO relationships within the business dynamic ensures effective operations and long-term success, nurturing a supportive and cohesive work environment.

Minimizing taxes

Minimizing estate and income taxes is a strategic goal in business succession planning. By implementing tax-efficient strategies, businesses can preserve wealth, allowing for seamless transitions and securing financial legacies.

Streamlining the retirement process

Streamlining the retirement process for the current leadership generation is a key aspect of business succession planning. Efficiencies in transitioning leadership responsibilities enable a smooth and effective handover, promoting continuity.

Control over decisions

Retaining control over decision-making processes is critical in business succession planning. By avoiding the delegation of crucial choices, businesses can ensure a strategic direction that aligns with their vision, values, and goals.

Benefits even in failure

Business succession planning remains valuable even in failure. It supports a successful transition to a new owner, offering opportunities for recovery and revitalization, ensuring that the business legacy endures despite setbacks.

Consider why BSP is important if you need to implement it in your enterprise as you consider all the reasons above.

It’s challenging to understand a concept like BSP without examples, so here are some ways you might use succession planning strategies in practice.

1. Performance management

Performance management involves setting performance objectives and assessing employee performance against them. 

Its primary goal is to ensure high-quality work, optimal performance, and efficient work processes. 

Identifying high achievers and areas for improvement is a key outcome of performance management.

2. Career planning

Collaborative efforts between management and employees define career objectives and align them with prospects as you strategically move employees into key positions. 

This process identifies employee strengths and interests, matching them with business needs. Career planning contributes to employee retention and enhances job satisfaction.

3. Mentorship and coaching

Active coaching and mentoring by managers and senior staff for employees with leadership potential assist them in gaining the necessary skills for promotion. 

These programs aid personal and professional development, unlocking individuals’ full potential and preparing them for leadership roles.

4. Internal competition

Fostering internal competition among potential leaders through assigning comparable responsibilities at the same executive level.

This approach, for instance, is seen in hedge funds, where potential fund managers control portfolios of similar sizes, aiding in identifying suitable candidates for senior positions.

5. Recruitment

The success of succession plans relies on recruiting individuals capable of filling essential roles. 

Developing broad sector relationships allows recruiters to swiftly fill crucial positions with external applicants, ensuring the continuous smooth operation of the organization.

6. Evaluation of metrics

Organizations assess succession planning programs through metrics such as bench strength, talent retention, leadership development, knowledge management, and competency management. 

This step involves evaluating leaders’ training readiness based on competency assessments, providing insights into the reliability of succession plans.

7. Knowledge management

The capture, identification, transfer, and utilization of organizational knowledge are integral to succession planning. 

Knowledge audits ensure the recording of sufficient information in specific divisions and functions, enabling future leaders to assume responsibilities in these areas seamlessly.

Having a formalized succession plan offers numerous advantages for both employers and employees.

Employee advantages

Employees know the potential for advancement and even ownership, fostering empowerment and increasing job satisfaction.

A plan for future opportunities reinforces employees’ commitment to career development because every staff member is a key employee in their role in the larger scale of the company.

Management and tracking advantages

Management’s dedication to succession planning results in supervisors mentoring employees to transfer knowledge and expertise.

Improved tracking of employee value enables leaders or HR to fill internal positions promptly when opportunities arise.

Improved communication

Enhanced communication between leadership and employees facilitates each business partner’s shared understanding of company values and vision.

A new generation of leaders is essential during mass workforce retirements.

Proper succession planning is particularly beneficial for public company shareholders. 

Having the next CEO actively involved in business operations and well-respected long before the current CEO’s retirement ensures stability. 

A well-communicated succession plan prevents investors from selling the company’s stock when the CEO retires.

Additionally, succession planning can cultivate a new generation of leaders, serving as an exit strategy for business owners looking to sell their stakes.

Recent academic sources suggest there are three major barriers to business succession planning: Tax, finances and legal issues. 

Tax poses a significant barrier to business succession planning due to complex regulations and financial implications. 

Transfer of ownership can trigger substantial tax liabilities, discouraging smooth transitions and hindering the effective implementation of succession plans.

Financial challenges hinder business succession planning, creating hurdles in funding the transition process. 

Lack of resources may hinder adequate preparation, limiting the ability to address critical aspects and ensure a seamless transfer of ownership.

Legal 

Legal issues pose a barrier to business succession planning by introducing complexities and uncertainties. 

Ambiguous regulations, contractual disputes between owners, and compliance challenges can impede the smooth ownership transition, creating obstacles in executing succession plans.

Consider these barriers and try to integrate them within your business succession plans by liaising with finance and legal teams and explaining the barriers and urge them to consider the best way to overcome them. 

More than 74% of leaders report they are unprepared and lack the training for the challenges they face in their roles . Knowing how to work with HR to achieve a business succession plan before attempting it ensures leaders’ approach is systematic and successful. 

Here are seven tips to initiate the succession planning process within your company.

1. Proactively develop a plan

Leaders must work with HR to anticipate potential departures via a workforce management plan to fill gaps during planned retirements or unexpected resignations. 

Leaders must assess the impact of critical roles on daily operations and consider the possible consequences of personnel changes. HR can then consider how to negate the impact of these changes in future. 

To develop your plan, follow these three steps:

•  Outline roles

Outline the roles, skills, and experience essential for successors (succession profiles). Seek extensive team feedback to comprehensively understand the requirements for your succession plan. 

• Anticipate future needs

Anticipate your company’s future needs through a 5-year forecast. Assess organizational structure changes, turnover patterns, compensation strategies, potential retirements, and future training plans. 

• Regularly revise job descriptions

Revise job descriptions based on gathered insights. Clearly communicate expectations to define suitable candidate profiles for the succession plan.

2. Identify succession candidates

HR can recognize team members capable of stepping into crucial roles. They must look beyond immediate organizational chart hierarchies and consider employees with skills conducive to higher positions.

Discovering suitable successors is pivotal in crafting an effective business succession plan. Methodically assess current talent, evaluating their skills, experience, and potential. 

Consider leadership qualities, adaptability, and alignment with organizational goals. Engage in open communication with potential candidates to gauge interest and aspirations. 

A meticulous identification process ensures a smooth transition, maintaining continuity and fostering the long-term success of your business.

3. Communicate the plan

Effectively communicating a business succession plan is essential for a seamless transition. Start by informing key stakeholders, such as employees, clients, and investors, about the plan’s purpose and benefits. 

Use clear and transparent messaging to address concerns and ensure understanding. Implement a phased communication approach, providing updates at appropriate intervals. 

Foster open dialogue to address questions and concerns, promoting a sense of stability and confidence in the transition process.

In private HR discussions, inform selected individuals that they are under consideration for roles of increasing significance. 

Emphasize the absence of guarantees and acknowledge that circumstances may alter the plan.

4. Enhance professional development

Elevating professional development within your business succession plan is crucial for future leadership. 

Intensify investment in the career development of chosen successors as part of workforce engagement management efforts. 

Implement job rotations to broaden their knowledge and connect them with mentors to enhance soft skills like communication, empathy, and diplomacy.

Identify key skills and competencies required for successors. Implement tailored training programs, mentorship initiatives, and continuous learning opportunities. 

Encourage collaboration and cross-functional experiences to broaden expertise. Regularly assess and adjust development plans to align with evolving business needs. 

Prioritizing professional growth ensures a robust pipeline of capable leaders for a seamless succession.

5. Trial the plan

Test potential successors by having them assume some of the responsibilities of a manager during a vacation. 

Pilot your business succession plan through a phased trial. Select a small-scale scenario, monitor its execution, gather feedback, and make adjustments accordingly. This trial ensures a smooth full-scale implementation.

Doing so provides valuable experience for the staff and allows you to identify areas requiring additional employee training .

6. Integrate with the hiring strategy

Align your hiring strategy with the business succession plan by identifying potential successors during recruitment. 

Foster a culture of mentorship and skill development, ensuring a seamless leadership transition.

Identify talent gaps left by potential successors and use this information to shape future recruiting efforts.

7. Consider your succession

When crafting a succession plan, consider your eventual replacement. Identify an employee who could step into your role and initiate measures to aid their preparation for the transition.

Your workforce is dynamic, and change is the only constant when it comes to employee behaviors. 

While predicting departures may be challenging, effective succession planning ensures business continuity, securing a stable future for your company using an agile approach to financial sustainability.

Implement business succession planning to ensure your survival

Implementing business succession planning is crucial for ensuring the survival and continuity of your enterprise as you keep ownership and avoid a buy-sell agreement scenario.

By identifying and nurturing future leaders, clarifying legal obligations, and addressing financial and tax considerations, senior leaders fortify their enterprise against unforeseen challenges. 

This strategic approach secures your company’s legacy and fosters resilience and adaptability for sustained success for any enterprise.

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Tristan Ovington

Tristan Ovington is a professional senior writer and journalist, specializing in providing expert insights on various topics such as digital adoption, digital transformation, change management, and Cloud apps. He delivers his knowledge through accessible online content that is data-driven and presented in a friendly tone, making it easy for readers to understand and implement.

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Buying and Selling a Business | Ultimate Guide

Business Succession Planning: 5 Ways to Transfer Ownership Of Your Business

Published October 11, 2019

Published Oct 11, 2019

WRITTEN BY: Robert Newcomer-Dyer

Business succession planning is a series of logistical and financial decisions about who will take over your business upon retirement, death, or disability. To write a succession plan, the first step is to identify the ideal successor to take over the business, then determine the best selling arrangement. This usually involves a buy-sell agreement, secured with a life insurance policy or loan.

There are five common ways to transfer ownership of your business:

• Co-owner: Selling your shares or ownership interests to a co-owner.
• Heir: Passing ownership interests to a family member.
• Key employee: Selling your business to a key employee.
• Outside party: Selling your business to an entrepreneur outside your organization.
• Company: For a business with multiple owners, you can sell your ownership interests back to the company, then distribute them to the remaining owners.

How a Business Succession Plan Works

A business succession plan is a document that is intended to guide through a change in ownership by providing step-by-step instructions. If a purchase is involved, the sale price and purchase terms are clearly outlined, relieving stress for the departing owner’s family. A well-crafted succession plan aims to benefit everybody—the departing owner, the business, employees, and the successor.

A small business succession plan should include the following:

• A succession timeline: Details regarding the circumstances when a succession would take place and specific dates as applicable.
• Your potential successors: A list of potential successors, including strengths and order of consideration.
• Formalized standard operating procedures (SOPS): A collection of documents, procedures, employee handbooks, and training documentation.
• Your business’s valuation: The valuation of your business should include the method by which is valued and be updated frequently.
• How your succession will be funded: Details including whether the succession is funded through life insurance, a seller’s note, or other funding options.

Who Should Create a Business Succession Plan

Succession plans are commonly associated with retirement; however, they serve an important function earlier in the business lifespan: If anything unexpected happens to you or a co-owner, a succession plan can help reduce headaches, drama, and monetary loss. As the complexity of the business and the number of people impacted by the exit grows, so does the need for a well-written succession plan.

You should consider creating a succession plan if you:

• Have complex processes: How will your employees and successor know how to operate the business once you exit? How will you duplicate your subject matter expertise?
• Employ more than just yourself: Who will step in to lead employees, administer human resources (HR) and payroll, and choose a successor and leadership structure?
• Have repeat clients and ongoing contracts: Where will clients go after your exit, and who will maintain relationships and deliver on long-term contracts?
• Have a successor in mind: How did you arrive at this decision, and are they aware and willing to take ownership?

Many business owners ignore succession planning because they don’t believe it’s necessary or put it off until they’re ready to retire. For small, simple businesses, a succession plan may not be necessary. However, consider what would happen to your business if you were no longer able to run the day-to-day operations. Who would take over? Would the business be viable?

When to Create a Small Business Succession Plan

Every business needs a succession plan to ensure that operations continue, and clients don’t experience a disruption in service. If you don’t already have a succession plan in place for your small business, this is something you should put together as soon as possible.

While you may not plan to leave your business, unplanned exits do happen. In general, the closer a business owner gets to retirement age, the more urgent the need for a plan. Business owners should write a succession plan when a transfer of ownership is in sight, including when they intend to list their business for sale, retire, or transfer ownership of the business. This will ensure the business operates smoothly throughout the transition.

The 5 Common Types of Succession Plans

There are several scenarios in which a business can change ownership. The type of succession plan you create may depend on a specific scenario. You may also wish to create a succession plan that addresses the unexpected, such as illness, accident, or death, in which case you should consider whether to include more than one potential successor.

Here are the five most common types of small business succession plans in detail.

1. Selling Your Business to a Co-owner

If you founded your business with a partner or partners, you may be considering your co-owners as potential successors. Many partnerships draft a mutual agreement that, in the event of one owner’s untimely death or disability, the remaining owners will agree to purchase their business interests from their next of kin.

This type of agreement can help ease the burden of an unexpected transition—for the business and family members alike. A spouse might be interested in keeping their shares but may not have the time investment or experience to help it blossom. A buy-sell agreement ensures they’re given fair compensation, and allows the remaining co-owners to maintain control of the business.

Potential Drawbacks

A buy-sell agreement with a co-owner requires a lot of cash kept on-hand. Your co-owner should be prepared to buy-out your shares, theoretically, at any moment. Many businesses will fund this plan with life insurance. Term life insurance is relatively inexpensive and can offset a lot of costs in the event of an owner’s death. Permanent life insurance is a bit more expensive with the added benefit of a payout in the event of retirement or disability.

If you choose to draft a buy-sell agreement with your co-owner, you’ll want to make sure a life insurance policy is stipulated in the agreement. The company can also purchase key person insurance that pays out in the event a key member of the business dies or becomes disabled. We recommend speaking with an expert for specific help on the type of policy you’ll need.

2. Passing Your Business Onto an Heir

Choosing an heir as your successor is a popular option for business owners, especially those with children or family members working in their organization. It is regarded as an attractive option for providing for your family by handing them the reins to a successful, fully operational enterprise. Passing your business on to an heir is not without its complications.

Some steps you can take to pass your business onto an heir smoothly are:

• Determine who will take over: This is an easy decision if you already have a single-family member involved in the business but gets more complicated when multiple family members are interested in taking over.
• Provide clear instructions: Include instructions on who will take over and how other heirs will be compensated.
• Consider a buy-sell agreement: Many succession plans include a buy-sell agreement that allows heirs that are not active in the business to sell their shares to those who are.
• Determine future leadership structure: In businesses where many heirs are involved, and only one will take over, you can simplify future discussions by providing clear instructions on how the structure should look moving forward.

Failing to address these steps may lead to a chaotic transition. For example, if a future leadership structure is not implemented, and the business passes on to more than one heir, the resulting power struggle may negatively impact the business. Alternatively, each heir may incorrectly assume the other will take over day-to-day responsibilities.

Before instructions can be given on who will take over leadership of the business, a future leader should be chosen. This is likely to be complicated when more than one heir is interested in taking over. Business owners can reference current business contributions and responsibilities from potential heirs to assist in choosing a successor.

Making business decisions within a family can get messy. Emotions can run high, especially after an untimely death or disability. Further, second-generation businesses rarely survive the transition, as they’re often sold by the inheriting family member, or fail outright. Only about 30% keep the same name and ownership following an inheritance.

Altogether, this should beg the question; is inheritance even the best idea? If your successor is skilled and business savvy, then perhaps the answer is “yes.” If not, you may consider selling your business to a co-owner, key employee, or outside buyer instead.

3. Selling Your Business to a Key Employee

When you don’t have a co-owner or family member to entrust with your business, a key employee might be the right successor. Consider employees who are experienced, business-savvy, and respected by your staff, which can ease the transition. Your org chart can help with this. If you’re concerned about maintaining quality after your departure, a key employee is generally more reliable than an outside buyer.

Just like selling to a co-owner, a key employee succession plan requires a buy-sell agreement. Your employee will agree to purchase your business at a predetermined retirement date, or in the event of death, disability, or other circumstance that renders you unable to manage the business.

A common drawback to key employee succession is money. Most employees aren’t in the financial position to buy the business they work for. Even if they are, having enough liquid cash on hand is another challenge.

One solution is seller financing, in which your employee pays you (or your family) back over time. There’s typically a down payment of 10% or higher, then monthly or quarterly payments with interest until the purchase is paid for in full. The exact terms of the loan will need to be negotiated and then laid out clearly in your succession plan.

4. Selling Your Business to an Outside Party

When there isn’t an obvious successor to take over, business owners may look to the community: Is there another entrepreneur, or even a competitor, that would purchase your business? To ensure that the business is sold for the proper amount, you will want to calculate the business value properly, and that the valuation is updated frequently.

This is easier for some types of businesses than others. If you own a more turnkey operation, like a restaurant with a good general manager, your task is simply to demonstrate that it’s a good investment. They won’t have to get their hands dirty unless they want to and will ideally still have time to focus on their other business interests.

Meanwhile, if you own a real estate company that’s branded under your own name, selling could potentially be more challenging. Buyers will recognize the need to rebrand and remarket and, as a result, may not be willing to pay full price.

Instead, you should prepare your business for sale well in advance; hire and train a great general manager, formalize your operating procedures, and get all your finances in check. Make your business as stable and turnkey as possible, so it’s more attractive and valuable to outside buyers.

One of the main drawbacks to an outside sale succession plan is the unexpected: It’s nearly impossible to predict exactly what the sales process will have in store. The process of selling a business to an outside party is complex and could encounter roadblocks like: your business not being as valuable as you anticipated, lack of credible buyers, your business not being able to sell at all, and more. Business brokers, like VNB Business Brokers , are experienced and well-versed in all aspects of selling and purchasing businesses on their clients’ behalf.

Consider outsourcing to a business broker so that you can focus on running your business and maintaining its value while professionals handle the sale. In addition to taking care of potential problems, VNB will ensure all steps of the process including finding and vetting buyers, structuring your deal, preparing documents, and negotiating terms. After one quick call, VNB Business Brokers will be able to tell you things like: what your business is worth, if the valuation price can be increased and how long it will take to sell your business.

Schedule a free consultation today and find out what the next step is.

5. Selling Your Shares Back to the Company

The fifth option is available to businesses with multiple owners. An “entity purchase plan” or a “stock redemption plan” is an arrangement where the business purchases life insurance on each of the co-owners. When one owner dies, the business uses the life insurance proceeds to purchase the business interest from the deceased owner’s estate, thus giving each surviving owners a larger share of the business.

An entity purchase is similar to a cross-purchase, in which you sell your shares to a co-owner or co-owners. In most circumstances, a cross-purchase is more financially viable. When co-owners purchase shares directly, they get a “step-up in basis,” which means the stock’s basis is revalued at its current price. With an entity purchase, the original basis remains, and your co-owners will be liable for potentially higher capital gains.

Despite this drawback, entity purchases can still be beneficial when you have a large number of co-owners. Drafting cross-purchase agreements with each owner can be cumbersome. An entity purchase agreement, in comparison, is much simpler to implement. It can typically be funded with a single life insurance policy for each co-owner.

How to Create a Succession Plan

There are several key steps necessary to create a comprehensive small business succession plan, and several ways to go about creating your plan. Some business owners may choose to create their own succession plan, while others may wish to engage the help of a professional, depending on the complexity of the plan and the business.

Whether you create your plan yourself or engage a professional, the five steps to writing a succession plan are:

• Determining timeline: Define when the succession should take place, either on a predetermined date or in the event of death or disability.
• Choosing your successor: If this is not a purchase by a specific party, consider choosing three or more potential candidates, filling out a profile for each.
• Formalizing your standard operating procedures: Document your standard operating procedures (SOPs), including an organizational chart, employee handbook, operations manual, and any other recurring meetings or processes.
• Valuing your business: Several methods exist to value your business. Once you have calculated your business’s value, it should be updated frequently.
• Funding your succession plan: Define a specific path that lays out how the successor will purchase the business. Options include life insurance, loan, and seller financing.

Small Business Succession Planning Providers

Creating a small business succession plan can be complicated, and many business owners choose to engage a professional third party to help them determine the value of the business, the type of succession plan, and create any supporting documentation. The choice of provider may be based on the complexity of the business as well as the event being planned for.

For small businesses with multiple employees and simple to complex finances, a local CPA may be a viable option, or you might consider hiring a business attorney to help you draft the paperwork. For more complex scenarios, a business attorney and CPA should likely be involved, to ensure that everything goes smoothly when the succession plan kicks in.

Finally, for larger, more complex businesses, business owners may wish to consider working with an accounting firm with extensive experience in creating business succession plans. There are hundreds, if not thousands, of such firms. Business owners can start by researching local firms or may choose to work with one of the so-called “Big Four,” such as PriceWaterhouseCoopers—operating as PwC—which specializes in privately held businesses.

Succession Planning Pro Tips

1. Avoid common mistakes

Asghar kazim, cfp, chfc, clu, principal & co-founder, united wealth group llc ..

“One of the most common mistakes business owners make in succession planning is failing to review their plan regularly. Time changes many things and, for your succession plan to be effective, it needs to be reviewed regularly and updated to reflect any changes. These could be company changes, tax law updates, changes in valuation, or new industry developments, among other things.

“For family-owned businesses, you’ll also need to consider aspects such as changing family dynamics—do all members have the same desire regarding what to do in the future, or are all key players still with the business? Business owners must update and adjust their business plan to reflect changes such as these.”

2. Create your succession plan at the right time

Whitney l. sorrell, jd, cpa, mba, principal attorney, sorrell law firm, plc.

“Business owners should start the succession preferably 5 years or more before they want to retire. Many business owners want to transfer their business to their family members in a way that minimizes the tax cost, holds the business assets in asset protected structures, continues the cash flow to the business owner post succession, and ensures a successful transition of management to the succeeding family members.

“The techniques bringing these benefits have better results over time. Other business owners are selling their business to a third-party buyer. Again, allowing time to prepare the business for sale will reach the highest possible price, and allowing time to properly structure that sale will allow the transaction to incur the smallest legal tax liability and the greatest level of wealth protection upon receipt of the sale price.

3. Consider the benefits of succession planning

Ed alexander, esq., founder, alexander abramson, pllc.

“The benefits of succession planning are that you don’t spend 30 years running and building a business only to leave empty-handed. Liquidating and closing up shop—not selling out—will be very unprofitable. The majority of the value of most businesses is in their goodwill and intangibles, not their hard assets.

“As I tell my clients, failing to plan is planning to fail. There have been many times when I’ve spoken to clients after their business sales, and they say to me, “I wish I’d started planning earlier.” They’re happy with the outcome, but they only realize after the fact how much even six months of additional planning could have improved the sale price.”

Bottom Line

While many experts recommend beginning succession planning three to five years ahead of retirement, it is never too early to begin. Knowing how your business will transition, who will take over, and how heirs and partners will be compensated are all keys to reducing future stress in the event of an owner’s sudden departure.

About the Author

Find Robert On LinkedIn

Robert Newcomer-Dyer

Robert has over 15 years of experience in sales leadership, finance, and business development. He recently spent six years leading a team of small business financing professionals, facilitating the deployment of critical capital to over 9,000 small businesses across the US.

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Business Succession Planning: A Step-by-Step Guide

Business succession planning is a valuable tool for both small businesses and growing enterprises. In small businesses, succession planning means effectively managing changes in ownership or leadership. In larger organizations, it that can help to avoid potential talent gaps that have a detrimental effect on the company. The right strategy can help you plan ahead so that you can transfer knowledge and retain employees in key roles. And this is a top priority in these uncertain, post-pandemic times.

With that in mind, we have created a step-by-step guide to help you design and implement a plan that sets your business up for long-term success . We will take a look at the benefits of succession planning in HR and break down the succession planning process to help you understand everything that’s involved.

What Is a Succession Plan?

Why is business succession planning important, what is succession planning in hr, the business succession planning process in 5 steps, business succession planning best practices, succession planning template, succession planning tools.

• Create a succession plan with performance management software 🚀

So, what is the definition of succession planning? How can you apply it to your business?

Business succession planning is a process that helps you prepare your company for the future. Essentially, it’s about creating a strategy and process for identifying potential future leaders and developing their skills so that they are ready to take on a new role when one of your key employees leaves the company.

Through careful planning, communication, training, and feedback, you can create a successful change management strategy that prepares you for potential transitions in your business. This helps you avoid key player talent gaps. It also helps you proactively develop your inclusive leaders of the future.

Despite its valuable role in business planning, according to a survey conducted by SHRM last year, only 44% of HR professionals claim that their organization has a succession plan in place. What’s more, only 21% of those that do have a plan in place have created a formal succession management plan.

Do you have a detailed succession plan in place? If not, then you’ve come to the right place.

According to the 2021 Global Leadership Forecast , companies around the world are facing a leadership crisis. In fact, only 11% of surveyed organizations reported that they have a “strong” or “very strong” leadership bench, the lowest rating in the past 10 years (it has been in decline since 2011’s reported 18%). This drop has been attributed to a decline in leadership development and transition training in organizations.

Understandable given the distractions the world has had over the past couple of years.

Nonetheless, this figure shows just how important it is for organizations to work on their succession management strategies. This is the most effective way to ensure that the leaders of the future have the right skills and experience to guide them to success . And this is what business succession planning is all about.

By preparing strong leaders for the future, you can help your organization reach its long-term goals, reduce employee turnover , and build a stronger and more resilient business that’s ready to thrive.

Benefits of Business Succession Planning

In case you’re still not convinced, let’s take a look at some of the specific benefits of business succession planning in a bit more detail.

• Identifying and developing your existing employees for future leadership roles helps you to promote from within . Aside from reducing turnover and hiring expenses , this also helps you ensure your future leaders have the right organizational knowledge and internal relationships , something which external recruits will lack.
• Promoting the development of your existing employees shows them that you are willing to invest in their future . This can be a great morale boost that motivates employees to stay at your company. This helps you stay competitive and attract top talent to your business.
• A well-designed succession plan helps you formalize training for both present and future leaders. It keeps your business moving forward and helps you retain your top performers .
• Business succession planning is also an effective tool for mitigating the risks of organizational change . This helps you avoid any potential talent gaps when someone leaves your company. It also helps you pass on valuable institutional knowledge to future leaders before it’s too late.

Succession planning in HR consists is a vital part of talent management. It’s all about your role as an HR professional in identifying key roles and positions that may need filling in the future and finding and developing internal candidates who may have the right skills and experience to fill them. The right strategy can help you retain staff, cut recruitment costs and better manage your internal recruitment processes .

HR succession planning is the process of identifying, selecting and developing employees who could potentially become key players with the right development. This helps you prepare for potential organizational changes so that you have skilled and engaged employees waiting to fill key leadership roles when the time comes.

As an HR professional, you play a significant role in preparing and facilitating your organization’s succession management strategy. However, for your succession planning in HR strategy to succeed, it’s equally important to get the support of senior management so that your plan is as effective as possible and aligned with your organizational goals .

Talent Management and Succession Planning: Employee Buy-in

Business succession planning is also about managing your existing talent so that you are able to retain as much institutional knowledge and experience as possible. This means that, aside from working with senior management, you also need to rely on the feedback of your employees.

What do we mean by this?

Essentially, it’s all good and well managing and developing your existing talent, but they need to be on board with your succession plan and have a genuine interest in remaining at your company and developing their skills. Otherwise, the time and money you invest in preparing them for future leadership positions will be wasted.

Make sure the potential succession candidates you select are:

• Interested in learning new skills
• Comfortable with change
• Motivated and engaged
• Able to adapt to uncertainty and new working environments
• Willing to take on more responsibilities
• Up for a challenge

Now that we’ve discussed what business succession planning is, let’s take a look at what you need to include in your succession planning process.

Make sure your succession planning framework includes the following 5 key stages.

Define & Align Your Goals

The first step is creating a succession leadership plan. This means you need to define your goals and align them with your business. You may need to meet with senior leaders for this phase to ensure your goals are aligned with your overall strategy.

You also need to have a clear idea of who you are as a business before creating your succession leadership plan. Once you understand “who” you are, you will be better equipped to identify your potential new leaders.

Finally, to complete your plan, you need to:

• Define the roles, skills, and experience that each successor will require (your succession profiles). Make sure you gather as much feedback on this as possible from your team to help you get a full picture of what you need to include in your succession plan.
• Create a forecast of your company’s needs . Where do you need to be as a company within the next 5 years? How will your organizational structure change over this time? Think about your turnover trends, compensation strategies, who may be due to retire, and training and development plans for the future.
• Update your job descriptions to reflect the information you’ve gathered. Make sure you are clear about your expectations . This will help you define the right candidate profiles for your succession plan.

Create Your Succession Strategy

Defining your goals is one part of your plan, but you also need to create a comprehensive succession planning strategy to make sure you are on the right track – you need a business strategy game plan !

So, what does this mean, exactly?

Put simply, you need to define a series of actions and strategic moves that help you align your succession goals and objectives with your overall HR strategy .

Consider the following:

• Where do you want to be as a business? What roles, positions, skills and experience will you need to succeed?
• Which senior/leadership roles do you need to create a succession plan for?
• Will you take business succession planning into account during performance appraisals in order to identify potential candidates throughout the year?
• Does your business have any specific vulnerabilities that may affect your succession plan? (For example, a high percentage of employees that are due to retire soon)
• Have you considered adjusting your hiring strategy to account for successor roles?

The key here is to be as proactive as possible with your strategy. Anticipate potential gaps in your workforce before they occur.

Identify Potential Candidates

The next step is to evaluate your current workforce in order to identify key positions that may need filling in the future, and key employees that may be suitable replacements. This is where you will implement the succession profiles and job descriptions that you created in the previous step. The more information you include in your profiles and descriptions, the easier it will be to identify the right match within your existing workforce.

Generally speaking, the best candidates will be supportive, proactive, engaged with learning and development, great problem-solvers, adaptable and able to take on more responsibility.

It’s important to be as objective as possible in this stage. You also need to consider that potential candidates may not currently be in leadership roles. It’s all about finding potential. The most effective way to do this is by using succession planning tools and metrics, rather than relying on personal opinions. More on this shortly.

Establish Professional Development Opportunities

As soon as you have your list of potential candidates and you know what skills they need to work on in order to eventually fill the role you have matched them to, it’s time to create a professional development plan to help them get where they need to be.

Which skills does each candidate need to develop? What learning opportunities would help them get the right experience and expand their current skillset? Are there any knowledge gaps that you need to address?

Create a list of the skills each candidate currently has vs. the skills they need to acquire, then work out the best way to offer them suitable opportunities for learning and development. Create individual development plans, offer formal training, consider creating a mentoring or coaching program to support them, and encourage continuous feedback and communication.

Implement Your Plan

The final stage is implementing your business succession plan. This will usually be a gradual transition with multiple short and long-term layers.

The first layer involves officially announcing your succession plan and notifying potential candidates. You then need to roll out your individual development plans and arrange training. Introduce candidates to their mentors, if you are using them, and encourage them to meet regularly. This will show your employees that you support their professional development, and you can see that they have potential.

Most importantly, make sure you collect regular feedback to see how your individual development plans are progressing, and if potential candidates are on track to reach their succession objectives.

Here are a few business succession planning best practices to help you create a plan that sets you up for success:

• Formalize your plan . The sooner you create and formalize a detailed succession management plan, the better. Make sure your succession planning process focuses on all key stages. That means not just identifying the roles and skills you need for your future leaders, but also implementing individual development plans to get your workforce where they need to be.
• Make sure your succession planning in HR plan is dynamic . Succession planning is all about change management. Be prepared to adapt to change by constantly updating your plan.
• Collect regular 360-degree feedback . This will help you keep track of your employees’ interests, skills, performance, strengths, weaknesses, and opportunities.
• Promote open communication . This will help you build trust and set clear expectations.
• Consider your entire workforce . Don’t just focus on your managers. Your leaders of the future might be hiding in lower-level positions. Look for potential, not existing skills.

One of the most valuable tools you can use for this strategy is a succession planning template. The right template will help you define key roles within your company and identify suitable replacements. Make sure you include a template in your HR audit checklist (check out this HR audit checklist template if you don’t already have one!)

Here are a few examples of the information you can collect with a succession plan template:

• Current key employees and potential replacements
• Key skills and experience that each position requires
• Candidate training and/or experience level
• The time it would take to onboard a candidate for an existing position
• An overview of upcoming vacancies (for example, key employees that are due to retire)

In order to create and manage an effective business succession planning strategy, you need to use the right succession planning tools. These are the tools that will help you identify which candidates could potentially be future leaders at your organization. They also help you identify potential succession gaps and map the right candidates to the right positions.

Ideally, you should be using a range of tools to help you get a full picture. Here are a few examples of succession planning assessment tools that will help you with this:

• Personality assessment tools : to help you get a comprehensive picture of your existing culture (e.g. tools for tracking motivation levels)
• Behavioral assessment tools : to help you identify and analyze employee leadership skills and assess how they behave at work (e.g. situational judgment tests)
• Cognitive assessment tools : to evaluate critical thinking and reasoning skills related to performance (e.g. a cognitive aptitude test)
• 360-degree feedback : to gather valuable input from employees and their peers in order to understand their readiness to take on future roles (included in most performance management software solutions)

Succession Planning Software

Finally, once you have designed and implemented your business succession plan, you need to regularly monitor progress. This will help you determine if your plan is working and if potential candidates are on track to reach their succession goals.

And this is where succession planning software can help.

Succession planning software isn’t as daunting as it sounds. In fact, most HRIS systems can provide you with the data you need.

The first thing you need is access to key metrics and KPIs . This includes turnover rates, retention rates, cost-per-hire, time-per-hire, and the rate of planned positions being filled. You also need to evaluate performance metrics to determine if business succession planning candidates that have taken on their new role were ready for it.

Did they achieve the training and experience they needed during the development phase in order to take on their new leadership role? If not, what could you have done better?

By analyzing the right data, you can determine what areas of your business succession planning strategy you need to work on in order to continuously improve the quality of your succession candidates. And by using the right HR software and performance management software you can easily identify talent gaps, make comparisons between employees, and simplify the succession management process.

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Your Business Needs a Succession Plan: Here Are the Basics

Succession planning may be the single-most neglected aspect of business ownership. Don’t make the same mistake that so many others do. Instead, get started with your plans today.

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In Part 1 and Part 2 of this series on selling your business, we’ve examined the questions facing owners who entered 2020 ready to make their move, breaking down how the COVID-19 pandemic changes the situation and how to increase a business’s value if you decide to delay bringing it to market. There’s another way forward, though — standing pat and not selling.

Tax Wrinkles for Work-at-Home Employees During COVID-19

If you were a business owner who was considering putting your company on the market but decided not to sell (or at least not anytime soon), what steps should be you taking now? The goals are to ensure preservation of the current business, as well as provide for an orderly and stable future transition when the proper time to sell arrives. Accordingly, the first and most critical step is setting a goal to implement both a business continuity plan and a business succession plan. The sooner, the better.

We have all learned a valuable lesson from the COVID-19 pandemic: A significant business disruption can happen with very little advance notice, and not being prepared can be disastrous.

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Developing a Business Continuity Plan

Armed now with the knowledge of how the pandemic impacted your own business operations, you can now plan. Did the travel restrictions impair your sales efforts? Did the substantial increase in employees working remotely overburden your IT infrastructure? Did your vendors and suppliers make requests that you couldn’t respond to effectively?

The goal of a business continuity plan is to identify that which is essential and that which is not and to place the business in a position where it can continue to operate during a disruption. Ideally, the business continuity plan would include:

• A comprehensive strategy for keeping the business operating day-to-day.
• An assessment of essential and non-essential operations and processes.
• An analysis of key employees/positions and how each would be impacted by a disruption and, specifically, the potential loss or unavailability of key employees.
• A review of facilities and analysis of how the business operates if one or more location becomes unavailable.
• A plan to protect, secure, back up and replicate, if necessary, critical data systems, infrastructure and applications.

These are only a few of the many issues for consideration when developing a business continuity plan. Many of the details are industry-specific, and you need to work with your key employees and advisers to address the challenges likely to face your particular industry. Consider meeting and discussing with your vendors, customers and suppliers the challenges that were presented by the COVID-19 restrictions. Get their views on how things could have been handled more effectively. Information is key to developing a plan that will actually work.

There’s Never Been a Better Time for Business Owners to Make a Move

Once you develop a plan, revisit it regularly and adjust and update it so that it is always ready to go when you need it. If, for example, your CFO retires, you will need to consider how the loss of that person and their particular knowledge will affect the plan. Will their successor have the wealth of historical knowledge necessary to obtain and transfer information in a timely manner? If not, consider how you address the gap. Every organization seems to have those “go-to” people who have been there forever and without whom things run much less smoothly. Consider how the plan is impacted if those individuals are unavailable. The key takeaway is that the plan needs to grow and change with the business in order to work effectively when the disruption happens.

Developing a Business Succession Plan

No matter what your plans are for the future of the business, eventually, you will transition it to someone. Perhaps that someone is a purchaser, or perhaps you will transition to your family, key employees or some combination of the two groups. The point is that transition will eventually be unavoidable. Ideally, you get to control and be part of the process. That, however, is not always the case. Unexpected death of an owner, key executive or employee can cripple a business if no successor has been identified and there is no plan for transitioning management.

Every business succession plan looks different. Not every business owner wants to transition their business in the same way or at the same time. Some owners want to exit completely at a certain date. Others want to stay involved to a lesser degree over time but never exit entirely. These issues, as well as many others, must be considered. The plan should be designed to:

• Address anticipated timing.
• Identify one or more successor.
• Address the value of the business.
• Provide for implementation of the plan.
• Discuss communication with employees, customers and family.
• Include tax planning.
• Provide for contingencies.

In my long career as a business lawyer, I have observed that succession planning is the single-most neglected aspect of business ownership. Maybe it’s human nature to think that we’ll always have time to deal with it later. The truth is, if you don’t get around to it and the unexpected occurs, the impact on your family and employees could be devastating. Also, we see many executive job candidates asking about a company’s transition planning before they are ready to commit to working there. Lack of a transition plan can therefore have a negative impact on attracting and retaining talented employees and executives.

The best way to approach the process, in my experience, is by dedicating a year to the effort. Spend three or four months discussing the process with your family, executive employees, your bank and other key stakeholders. Get your lawyer and accountant or other tax adviser involved from the outset. Develop and refine the plan over the next few months, and implement it over the last three or four months. One year is what you need. Negotiate the fees with your professional advisers in advance and get a budget for each phase. When it’s done, you’ll thank yourself, and your business will be better off for having gone through the process.

Final thoughts

As touched on in this article and the other parts of this series, the COVID-19 pandemic was and remains a major disruption that couldn’t have been foreseen by most business owners at the start of 2020. The confusion of the early days, however, is beginning to clear. For owners who were planning for a transition, there is path forward — be it bringing the business to a changed market, delaying the decision or staying put for a time.

No matter the decision, proper preparation and organization will make it easier.

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Patricia Farrell is a corporate law attorney in Pittsburgh. With a primary practice in business services, she regularly represents privately held businesses in mergers, acquisitions, divestitures and other major transactions, both in the United States and in Europe, Asia and Australia. She also has a broad corporate practice where she assists with corporate governance as well as succession planning for business owners and a variety of other day-to-day business issues.

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Original text

Do you think succession planning is just for family businesses or for business owners who are close to retirement? Think again.

Whether retirement is 30 years away, just over the horizon, or not in your game plan at all, a succession plan is vital to ensuring the continued success of your business.

A good succession plan can help:.

• Transfer ownership when the time comes
• Maintain your lifestyle in retirement
• Provide for your heirs financially
• Prepare the business to handle unexpected events

Why is a succession plan so important?

Life happens—and unless you have a plan to deal with the unexpected, the business you worked so hard to build could crumble if you become disabled, die, get divorced, or decide to split with your business partner.

Think of a succession plan as peace of mind for the business you’ve worked so hard to build.

In this guide, learn how to develop a succession plan that works for your business.  

Some items covered include:

1. Decide how to exit your business. Should you:

• Transfer the business to your heirs
• Sell the business to your business partner/s
• Sell the business to a key employee
• Sell the business to an outside buyer

2. Conduct a business valuation

Even if you aren’t planning to sell your business, conducting a business valuation has many benefits. It helps you develop a retirement income strategy, properly value future owners’ shares, and purchase adequate insurance for protection planning. It can even make it easier for your business or potential buyers to get loans or attract investors.

3. Prepare for the transition

The transition period to new ownership is a vulnerable time for a business. Prepare both your successor and your business for a smooth hand-off.

4. Review your plan regularly

Creating a succession plan is a big accomplishment, so give yourself a pat on the back. But don’t just file your plan away and forget about it. Over the years, key employees may leave your business, family members may lose interest in taking the reins, and your own plans for your future may shift. Reviewing your succession plan annually with your team of advisors will help ensure a successful and seamless transition — no matter when or under what circumstances it happens.  

Covering Your Back: The Buy-Sell Agreement Whether you’re launching with one partner or 10, the buy-sell agreement protects stakeholders from sticky situations that could rock the entire boat.

7 Legal and Financial Steps to Closing Your Small Business Exiting a business requires filing paperwork to officially dissolve your business with the state and taking care of other legal and financial formalities.

Copyright © 2024 SCORE Association, SCORE.org

Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.

Business Succession Planning: The Basics

When it comes to small businesses, every worker is essential. Most small businesses cannot succeed without the drive and dedication of owners and their families. However, the sudden loss of key personnel can stop your business in its tracks. If a founder suddenly passes away, COVID-19 impacts essential employees, or a manager leaves to handle personal issues, is your business prepared for their absence? Professional business succession planning helps business owners prepare for, absorb, and manage the sudden departure or incapacitation of key personnel, including themselves. Unfortunately, most companies do not realize they need succession plans until too late. As a result, America’s most successful business owners frequently have multiple succession plans to ensure their businesses thrive after unexpected management changes.

The experienced succession planning lawyers at McClanahan Powers, PLLC understand how quickly the loss of essential workers devastated small companies in 2020. Stay ahead of the game and protect what you’ve built by connecting with our dedicated Virginia and D.C. business attorneys online or by calling 703-520-1326 today.

Who will take over when or if I am gone?

If you don’t know the answer to this question, it’s probably time to make a business succession plan. State law generally determines your successor without a plan in place based on the type of business entity involved and applicable inheritance principles. The following default rules typically apply to business succession when owners have no takeover/buyout plans in place:

• Sole Proprietorship: No one takes over when the sole proprietor passes away. Any business assets and liabilities transfer to the owner’s estate and pass according to the owner’s will or state inheritance laws.
• Partnership: A partner’s death without a clear succession plan or partnership agreement often results in the partnership’s automatic dissolution. The remaining partners must liquidate business assets and distribute them to the absent partner’s estate. They may not generally buy out their partner’s interest or continue the partnership as it existed. This sudden dissolution might result in substantial tax and commercial liability.
• Limited Liability Company (LLC): An owner’s membership interest in a single-member LLC transfers to their heirs through a will or intestate laws. While this does not automatically result in the entity’s dissolution, it could inadvertently end the business.
• Professional Limited Liability Company (PLLC): All PLLC owners must maintain an appropriate professional license, i.e., attorney-at-law, CPA, or M.D. As such, management authority or ownership of a PLLC cannot transfer to an unlicensed heir. The Virginia Professional Limited Liability Company Act requires that any remaining licensed owners buy out the former member’s interest to maintain the entity. The incapacitation of all licensed PLLC owners generally results in the entity’s automatic conversion to an LLC.
• Corporation: Stocks transfer with their deceased owners’ estates. As such, a significant stockholder’s sudden death could result in their heirs splitting the former owner’s interest and changing the management dynamic.

If these results do not reflect your business and personal interests, consider drafting and executing incapacitation, buyout, and corporate succession plan with one of our experienced business succession attorneys.

Why is succession planning important for small businesses?

Even if all members agree to continue a business, the law often requires the automatic dissolution of certain entities when an owner passes away, leaves a partnership, or loses a professional license. Virginia business succession may also follow default inheritance law, resulting in drastic changes to the corporation’s management and direction. Without proper partnership succession and buyout planning, an entire entity could crumble.

The tax consequences, financial implications, and inheritance disputes associated with an owner’s sudden death or incapacitation might also sink the business. Will contests may leave remaining members unable to make critical business decisions, or the sole remaining member of a PLLC might not have the funds to buy another member manager’s interest. Heirs might also find themselves forced to liquidate individual stocks and membership interests to cover estate taxes and other liabilities associated with an owner’s passing. Unintended successors seldom have the same passion as an entity’s founding member. Heirs may agree to sell their interest or change the direction of the business itself. To create a lasting entity, you should develop strong succession, buyout, and emergency management plans. How can a succession planning attorney help?

The law permits most entities to override default succession principles through partnership agreements, articles of organization, estate plans, or other business contracts. These agreements may set both a successor and clear guidelines for a business entity’s future management and direction. Further, a succession planning lawyer could structure your ownership interests to pass outside your estate. Placing your stocks in trust, for example, results in the immediate distribution of the business interest to the designed beneficiary upon the occurrence of an event, i.e., retirement or death.

Planning for a key member’s retirement or incapacitation could save your business now and in the future. Business succession lawyers commonly recommend executing contracts addressing the following relevant concerns:

• Identifying successors, alternates, and the conditions of transfer
• Setting forth clear management guidelines, competencies, training requirements, and governing principles, i.e., requires continued healthcare for all employees.
• Directing the sale or dissolution of the entity and preparing for relevant tax consequences
• Placing business interests into a trust to avoid probate and estate disputes
• Developing emergency management and temporary decision-making plans as ownership changes hands or disputes arise
• Creating a backup system containing essential business documents, succession plans, and client contracts accessible by successors or business counsel
• Addressing and securing your retirement plan
• Wills, codicils, trusts, and relevant estate documentation

At McClanahan Powers, PLLC , our dedicated business succession lawyers could help you prepare for retirement and the unforeseeable loss of critical members and owners. They might also help you develop long-term management principles to ensure your company operates according to your core values. Consider speaking with our Virginia and D.C. succession planning and business development attorneys from preventing inheritance disputes to ensuring your business’s continuation upon incapacitation. Call 703-520-1326 to schedule your comprehensive succession needs assessment or connect with our virtual Vienna or Pennsylvania Avenue offices online .

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The Key to Successful Succession Planning for Family Businesses

• James Vardaman

Don’t exclude non-family members from the discussion.

Successfully passing the baton to the next generation is a goal for many family business leaders. It can also be a sound business move if the right steps are taken. By clearly communicating family succession intentions, developing strong relational bonds, and proving the fitness of next generation leaders, family firms can achieve buy-in from their nonfamily employees. Not only will this make for a smooth leadership transition, but it can also increase nonfamily identification with both the family and the firm, creating a more productive and satisfied workforce that propels the firm for years to come.

The succession process is one of the biggest challenges facing family firms, as most fail to remain a family business past the second generation. Among those that do succeed, a key concern is how nonfamily personnel will receive a successor. Perceptions of nepotism in succession can undermine nonfamily employee commitment to the business and their continued participation in the firm. Addressing this common issue can be difficult because the ability to choose a family successor and provide employment opportunities for family members is often a primary aim of family business owners. Thus, a key challenge for family businesses is gaining buy-in from nonfamily employees for the next generation of family leadership .

• WT Will Tabor is an Assistant Professor of Business Administration at Mississippi College. His research focuses on family businesses and organizational ethics. His work has been published in Family Business Review and The Journal of Business Ethics .
• JV James Vardaman holds the Chair of Excellence in Free Enterprise at the University of Memphis and is the author of Global Talent Retention: Understanding Employee Turnover Around the World .

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Create Your Business Succession Plan with This 10-Step Checklist

Do you need to create a business succession plan, but are feeling overwhelmed on how to get started? Use this business succession plan checklist.

Patrick Hicks , @PatrickHicks

Head of Legal , Trust & Will

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As the holidays and new year quickly approach us, we often find ourselves reflecting on the past year and all that we’ve accomplished. We also tend to look to the future and what we’d like to accomplish. We also spend a lot of time thinking about family, as well as gratitude for the life that we do have in the present. 

What all of these themes have in common is our legacies: what we’ve built in the past, what we’ve built now, and what we hope to continue to build and then eventually pass on in the future. 

Estate planning is a critical aspect of this, of course, but if you own a business, then you also need to be thinking about your business succession. If you’re not sure what a business succession plan is, or how to go about it, look no further! We’ve got you covered on all fronts. Here, we present to you our 10-step business succession planning checklist . 

Why create a business succession plan?

Before we get into the checklist, let’s review why you should create a business succession plan. A business succession plan is a process of creating a framework for what should happen if you were to exit the business, and how that will happen successfully. 

If you were to retire, have an emergency, etc., who would step up and step in? How would they do so, and will they have the tools and resources needed to make sure that operations continue smoothly? Answering these key questions, creating a strategy, and implementing the strategy are all important aspects of business succession planning. Without a proper plan, it could cause your business to lose value, clients, shareholders, or even go bust.

If you have a business of any kind, even if you are the sole employee, you should have a business succession plan in place, and without delay.

Business succession planning checklist

The process of business succession planning can be daunting, and frankly it can be a lot of pressure. After all, it’s the blueprint that should ensure the successful operation of your business for years after you’ve made your exit. 

In cases like this, it’s helpful to break processes into smaller, actionable steps and to follow a checklist. Below, you’ll find the 10 steps included in our business succession planning checklist. 

1. Have the necessary conversations to determine family + employee interests for the future

If you run your own business or family business, it’s time to start thinking about who will eventually replace you. In most cases, it’s ideal to have a family member succeed you before going to outside sources. 

Have critical conversations with family members, or current employees, to determine who might have the interest in passion to be involved in the future of the company. Here, you can’t entertain someone who is only half-interested. When the stakes are high, you’ll want to name someone who absolutely wants to take charge.

2. Decide who you want to run the business when you are no longer able to

Once you’ve had the necessary discussions with potential candidates, make a decision about who you want to run the business. This can mean multiple things. This could be the person who you trust to step in if you experience an emergency where you’re temporarily unable to run the business, or it can be something more permanent, such as when you retire or pass away.

Make a private list of those who you select to take over. Who is your first choice? Do you have a backup choice?

If you do not have a family member or existing employee whose shoulder you can tap, you may also consider external recruitment. Oftentimes, a solopreneur will take on an apprentice, intern, or mentee who they can groom to eventually take over. Make sure to consider the financial requirements of adding a new person to your team.

3. Create a management succession plan

Once you’ve figured out what your succession might look like, it’s time to write out a concrete plan.

Make sure to address scenarios, such as who will step into your role if or when you:

Pass away unexpectedly 

Experience an emergency that renders you unavailable

Take a sabbatical, long vacation, or other temporary leave

Going through these potential scenarios methodically will help you realize the need to have a succession plan in place right away, even if you don’t plan to retire for decades. Unexpected situations can arise without a moment’s notice.

In your plan, be sure to address the training and resources needed for this individual to be successful. This could include training and education, mentorship, access to systems, and financial resources. You also likely will need to address certain logistical issues and marketing requirements that only you would know about your business. 

In this case, over-communicating is better than under-communicating. Cover any little detail that you can think of. Assume that your successor only has this plan and associated instructions to go off of, and that you cannot serve as a consultant, in case you are unavailable.

4. Put a life insurance policy in place

The next few steps will focus on several measures you can take to provide added protections. The first one is acquiring a life insurance policy. If you were to pass away, your family will benefit from the financial support provided by the policy.

It may surprise you, but taking out a life insurance policy can benefit your business as well. That’s because it can serve as your transfer vehicle. If you were to pass away before divesting from the company, then the death benefits will be used to buy out your share of the business and will be distributed equally to your business partners. 

It can also be used to fund a buy-sell agreement.

5. Put a buy-sell agreement in place

A buy-sell agreement arranges what should happen if you were to pass away or otherwise exit the company. Typically, the agreement is such that your share of the business is sold and distributed amongst the remaining partners.

Although it may sound complicated, it’s possible to take out life insurance policies on each partner. Each partner would be both owner and beneficiary on the same policy. When one partner passes away, then the face value of their portion of the policy is paid out to the remaining partners so that they can buy out the deceased partner. This is often referred to as a cross-purchase agreement.

6. Consider family retirement planning

While you’re thinking about the future of your company, also be thinking about your family. What is your current income and your projected income at the time of retirement? 

When you retire, will you be able to meet the financial needs of your company? Make sure that you are including this as a part of your business succession plan. For example, perhaps you plan to retire but hold onto your share of the business. That way, you could continue earning profit (dividends) until you’re eventually bought out from the business. 

7. Plan for estate taxes

The value of your business may grow significantly between now and the time you retire. You should also be thinking about the size of your personal estate and how your business could contribute to your tax liabilities. 

Earlier, we discussed the option of a buy-sell agreement. This means that when you exit your business, or upon your death, your interest in the business will automatically transfer to your business partners. This will help make sure that your estate plan beneficiaries (such as a spouse or child) won’t inadvertently become owners of the business and become subject to estate taxes . Consider creating an irrevocable life insurance trust (ILIT) to hold the life insurance that will fund the agreement and avoid probate .

8. Confirm you have the proper business entity in place

Another approach is making sure you have the proper business entity in place. For example, you could establish a family limited partnership or a limited liability company (LLC). These options provide better protection for your business assets and provide more flexibility for your business write-offs and income taxes. Check out our article on how to transfer business interests into a limited partnership . 

9. Consider creating a revocable living trust

In addition to forming a family limited partnership or LLC, consider establishing a revocable living Trust. A Trust is a legal instrument that allows you to transfer ownership of assets, property, and business interest out of your name and into the Trust itself. It’s a fiduciary agreement that allows you to skip probate, protect your assets, and benefit from certain tax advantages.

The revocable living trust can own the general and limited partnership interests of your business. While you are alive, you can serve as your own trustee and beneficiary and maintain complete control of your business interests. Be sure to name a successor trustee to your Trust in the event you pass away or become incapacitated. 

10. Create your personal estate plan (in addition to your business succession plan)

The final, but not necessarily last, item in our checklist is the creation of your personal estates plan . You may have started noticing how your business succession plan can become closely intertwined with your personal estate.

You deserve it! You will have spent decades building up your business and ensuring its success, of course, you should be able to keep a piece of the pie for yourself and your family. Be sure to establish your personal legacy alongside your business legacy. 

Create your business succession plan today

Today we talked about how important a business succession plan is, as an aspect of creating, protecting, and sustaining your legacy. A business succession plan is a process of creating a strategy of how your business will get passed on when you decide to make your exit. It will also cover your bases in case you become temporarily or permanently incapacitated. 

In comparison, an estate plan is a process of planning how your personal assets are passed on. Because so much of your personal assets can be tied to your business, your business succession plan and estate plan are often interrelated. That’s why you should think of them as two separate but complementary strategies. When they are working synergistically, it can significantly bolster the value of what you can eventually pass on to loved ones. 

At Trust & Will , we’re here to help you keep things simple. You can create a fully customizable, state-specific Estate Plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our different estate planning options today!

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A Blueprint for Family Business Succession Planning

• Family business succession planning is complicated because it requires clients to make difficult decisions out of context.
• That’s why attorneys must provide a blueprint of the entire process at the beginning of the representation to make the process more effective.
• The blueprint will map out the process, but allow for any necessary changes along the way.

When the owners of a family business ask their attorney to advise them with business succession planning, counsel should begin with an outline that summarizes the entire process but that divides it into distinct projects that progress toward construction of a comprehensive succession plan. With the clients’ help, counsel can then refine the outline to more accurately reflect their circumstances, needs, expectations, and vision. This “blueprint” for the succession planning process will make the process more efficient, more effective, less stressful, and more rewarding for the clients.

The Case for Family Business Succession Planning

The most recent PWC U.S. Family Business Survey (2016) concludes that inattention to succession planning is a substantial problem for many family businesses in the United States. The authors of the PWC Survey found that owners of 69 percent of the family businesses surveyed expected ownership of the business to continue in the next generation, but only 23 percent had a robust, documented business succession plan.

The authors of the PWC survey call this finding “worrisome” and contend that serious problems such as the following can arise if a family business does not have a formal succession plan in place when owners cease to maintain control:

• next-generation family members may be reluctant, unprepared, or unable to lead;
• family members and other stakeholders may not support the choice for successor leadership; and
• the business may not have enough liquidity to support transition of ownership within the family.

The authors of the PWC survey correctly suggest that many succession problems can be avoided or mitigated if family businesses plan for succession, rather than wait until “the last minute, when options may be more limited.” “Regardless of when a business thinks a changing of the guard will take place,” they conclude, “it’s important to always have a plan ready for that eventuality, since unforeseen circumstances can cause a sudden need for new leadership.”

The PWC survey results and its authors’ conclusions will ring true for attorneys who have experience working with family businesses. The chronic failure of family businesses to engage in formal succession planning is at odds with their tendency to focus on long-term performance better than businesses that are not family owned. In the 2012 Harvard Business Review article, “What You Can Learn from Family Business” , authors Kachaner, Stalk, Jr., and Bloch assert that “[e]xecutives of family businesses often invest with a 10- or 20-year horizon, concentrating on what they can do now to benefit the next generation.” These same family businesses, however, often have no real plan for how the next generation will realize those benefits as successor owners and leaders.

To be fair, one reason why so many family businesses do not engage in proper succession planning is because it is difficult and complex. Family business succession planning must take account of countless unknown future circumstances and current facts that are continuously changing and interacting, including business factors like the economy, the regulatory environment, and the state of the market in which the business operates, as well as family factors like family dynamics and the changing skills, maturity, career objectives, economic needs, and health status of individual family members.

Under these circumstances of pervasive uncertainty and complexity, it is understandably difficult for family business owners to comprehend how they could construct a proper business succession plan. However, if their attorney can provide them with an organized, logical, step-by-step outline for succession planning, they may be much more likely to begin the process and eventually develop the kind of “robust, written” succession plan that the authors of the PWC survey and other family business advisors advocate.

The Blueprint for Family Business Succession Planning

Attorneys can use much of the text of this article to create their own outline for family business succession planning. The section on each project includes commentary that provides a description of the project and an explanation of legal concepts and other substantive factors that may affect how the clients make decisions about the project. Although the projects are arranged in sequential order, they should be considered concurrently. The substance of the projects are interrelated; therefore, the clients should make decisions about each project with a solid understanding of how they intend to address projects that appear later in the outline.

One important prefatory piece of business: For the purpose of this article, the term “clients” is used broadly to include collective decision makers for the business and family. However, for each family business succession planning engagement, it is important to establish an understanding, in writing, about which parties counsel represents (and which parties counsel does not represent). For example, the attorney might choose to represent the business (or more accurately, some or all of the companies owned by the family) and/or the senior generation of owners (or some of them). If the attorney represents more than one party, he or she should obtain conflict waivers and joint representation agreements as necessary. The attorney should also ensure that the parties the attorney does not represent understand that the attorney does not represent them and that they should consider obtaining the advice of independent counsel before signing documents that the attorney has drafted as part of the business succession plan.

1. Collecting Information

Before counsel begins to design a family business succession plan, counsel should review copies of current business governing documents, related party contracts, and estate planning documents that might affect governance, ownership, or succession of the business. The clients and their other advisors should help the attorney collect these documents. This process also offers clients an opportunity to get their personal and business records organized and establish procedures for keeping them organized and current. For a list of information to request, see the sidebar entitled “Due Diligence for Family Business Succession Planning.”

2. Valuation

Proper family business succession planning requires a reliable valuation of the stock of the family’s primary business entities and other important business assets when planning commences and throughout the term of family ownership. If the clients do not already have current opinions of value, counsel should help the clients obtain them. This can help the attorney and the clients avoid major mistakes in the planning process that the attorney might otherwise make if working on faulty assumptions of value.

Obtaining a current valuation can help the clients in other ways as well. The evaluation process can reveal information about the strengths and weaknesses of the clients’ business that the clients can use to improve operations and profitability. The valuation professional can also help counsel draft the most appropriate purchase price language in the clients’ buy-sell agreements. Finally, the clients can maintain their relationship with the valuation professional to obtain updated opinions on a regular basis (such as every two years) for the purposes of the clients’ buy-sell agreements and for transfers of ownership interests within the family to implement the succession plan.

3. Business Continuation Plan

If there are key family members who are particularly important to the operations or success of the family business, then early in the succession planning process, counsel should help the clients establish mechanisms to address the disruptions that would be caused by the sudden death or incapacity of one of those key family members. For example, the attorney should ensure that the controlling owner has updated powers of attorney appointing an appropriate person to vote clients’ interest if suddenly rendered incompetent; the attorney should ensure that the controlling owners’ stock designates an appropriate transfer-on-death beneficiary (such as their living trust) to avoid the delay of probate if they die during the succession planning process; and the attorney should ensure that the clients have a plan to replace the chief executive, at least on an interim basis, if he or she unexpectedly exits the business. These are temporary measures that will be replaced or supplemented by more permanent structures and procedures when the clients have made more progress on their succession plan.

4. Restructuring

After counsel reviews the existing business documents and obtains input regarding business valuation, counsel should work with the clients’ accountants to help the clients determine whether the business should be restructured or reorganized. It may be that making changes to the legal structure or tax treatment of the components of a clients’ business will facilitate succession planning. For example, it may be easier to plan transitions of ownership if the primary source of cash flow is taxed as a partnership rather than a C corporation, or if the real estate assets are held in entities that are separate from primary operations. The attorney should work with the clients’ accountants to ensure that any restructuring will be tax efficient (including income taxes and transfer taxes). Counsel must take into account other advantages of restructuring, such as limitations of liability, operational efficiencies, and diversifying ownership opportunities for family members. The attorney should include plans for how new ventures will be added to the structure in the future.

5. Governance and Buy-Sell Structures

Before updating the senior-generation owners’ estate plans with respect to the allocation of ownership among their beneficiaries, and before the senior-generation owners make additional lifetime transfers of ownership interests to members of the junior generation (or trusts for them), counsel should help the clients design the rules that will regulate governance, ownership, and owner exits after control has transitioned down from the senior generation. This includes four topics, which can be addressed in the business’s governing documents and agreements among the owners.

a. Unit Voting

The power to exercise owners’ voting rights primarily includes the power to appoint (or remove) board members and approve (or veto) major transactions. The clients should consider who should have the right to exercise owners’ voting rights. In some cases, voting units can be held in trust, to be voted by a fiduciary or a committee of fiduciaries, or the owners can sign agreements about how they will vote their units on particular issues. Governing documents can also be drafted to increase the scope of actions that require owner approval.

b. Governing Board

Members of a governing board, acting collectively, usually have the following powers: power to appoint and remove top executives and determine their compensation; power to issue dividends; and power to oversee budgets and long-range business planning, risk management, and strategic planning. The clients must decide how the board will be composed and how board members will be elected. Clients should consider the advantages of requiring an independent presence on the board, especially after members of the senior generation exit the business. Under most default rules, each board member is elected by plurality, but it may be desirable to “classify” the board so that each substantial owner can have one or two seats on the board. Governing documents can also be drafted to increase or decrease the amount of actions that the board can authorize without approval of the owners.

c. Executive Authority

Executives and officers have power and responsibility to run the day-to-day business, hire and terminate staff, develop budgets and plans for approval by the board, and sign checks and contracts, including loan agreements (within limits set by the board). While senior-generation owners are alive and competent, their status as patriarchs or matriarchs may naturally enable them to help their children and grandchildren make decisions about executive authority and compensation among family members, but after they are gone, the business’s owners and board must have a way to make decisions about the appointments, titles, duties, and compensation of family members that will be fair and will not disrupt family harmony.

d. Beneficial Ownership

Owners of business equity (which can be referred to as “beneficial owners” when considered apart from the power to vote the ownership interests (discussed above)) have the right to receive profits and appreciation from business operations. (Note: If the owners are also employees, they may receive most of their annual economic return in the form of compensation.) The clients should consider whether nonemployee family members should own shares and whether shares should be held in trust (primarily to protect them from estate taxes and claims of creditors or in the event of divorce). The clients should also decide upon mechanisms for owner exits that are fair to the exiting owners but are not disruptive to the business. The acquisition, ownership, and transfer of ownership interests, including redemptions triggered by retirement or other separation from employment at the business, should be drafted into updated governing documents.

It should be noted that although the business’s governing documents can provide the legal rules by which the business is governed and owned, the clients should also consider developing a family constitution, mission statements, and other policies that will guide decision makers when they apply the legal rules. The business’s legal documents cannot express the spirit and philosophy of the family as effectively as the principles that family members write in plain English and agree together to uphold.

6. Key Contracts

The attorney should help the clients negotiate restatements of key contracts with third parties that should (or must) be updated to be more consistent with business restructuring and anticipated changes of control or ownership. Such contracts include loan facilities and franchise/dealership agreements. The extent to which such contracts cannot be changed may affect decisions about how or when to implement other elements of the business succession plan.

The clients should also consider whether written contracts for related-party transactions would make the succession plan more effective. Such contracts may include the following: leases between the operating business and family-owned entities that hold real estate or equipment used by the operating business; debt instruments for loans from owners to the business; reimbursement/contribution agreements among the business and the owners who have personally guaranteed business debt; and employment agreements for family members who work for the business.

7. Update Senior-Generation Owners’ Estate Plans

The attorney should update the senior-generation owners’ estate planning documents, including wills and revocable trusts, consistent with business restructuring and decisions that the clients have made about future governance structures and ownership rights. Updates should address the following: specific allocation of stock/unit voting rights; specific allocation of beneficial interest in business equity; disposition of other important business and personal assets; specific use of life insurance proceeds; the source of funds needed to pay estate taxes; and the structure, funding, and amount of charitable bequests.

8. Plan for Senior-Generation Owners’ Retirement

Before the senior-generation owners transfer control and substantial equity interests to the junior generation, counsel should work with the senior generation and their financial advisors to help ensure that senior-generation members will have sufficient economic means to support them indefinitely in retirement (or in the event of disability). In particular, counsel must seek means of support, cash flow, and assets for retirement that are not dependent on the success of the next generation of owners of the family business. Although plans like unfunded deferred compensation, private annuities, or seller-financed redemptions may look good on paper, they may place disproportionate risk on members of the senior generation when they are no longer in a position to affect business outcomes.

9. Lifetime Transfers to the Next Generation

Ideally, the senior-generation owners will be able to oversee the transition of leadership and ownership of the family business to the next generation through lifetime transfers, rather than rely on post-mortem contingency planning. Counsel should work with the clients’ accountants to design lifetime transfers that are tax efficient, but the attorney should not sacrifice the financial well-being of the senior generation in a blind rush to redistribute wealth to avoid estate taxes. In most cases, a combination of diverse approaches to estate tax planning can give the clients time to implement a family business succession plan at a pace that makes business sense and is more likely to meet the long-term economic needs of the senior-generation owners and their successors.

Family business succession planning is complicated because it requires the clients to make many difficult decisions out of context. However, by providing the clients with an outline or blueprint of the entire process at the beginning of the representation, and by keeping that outline updated as decisions are made and projects are completed, counsel can make the process more effective, more efficient, and ultimately more successful.

Further, like a blueprint for building a house, the outline provides direction for original construction, but it does not foreclose the possibility of future modification, renovations, or improvements. As the authors of the PWC survey advise, “[O]nce a plan has been put into place, it shouldn’t be treated as a one-time event. Good succession planning involves a series of intentional, well-coordinated, strategic efforts, sustained over time . . . .”

Due Diligence for Family Business Succession Planning

At the start of a new representation with respect to family business succession planning, counsel should identify the clients’ key advisors, including accountants, financial advisors, and insurance agents. The attorney must ask the clients and their advisors for the following documents and information:

• Articles of Incorporation/Organization
• Shareholders’ Agreement/Operating Agreement
• Voting Agreements or Voting Trusts
• Table of current ownership
• Leases or other agreements between the business and any other family entity
• Any employment contracts with family members
• Any deferred compensation or other nonqualified retirement benefit contract between the business and a family member
• Any personal guarantees of the business debt
• Revocable Trust or Trusts
• Irrevocable Trust or Trusts (if any)
• Marital Property Agreement (if any)
• Powers of Attorney for Health Care
• Powers of Attorney for Financial Matters
• Most recent formal or informal valuation of the business
• Most recent indication of value of business assets (and statement of balance of any mortgage debt)
• All substantial loan facilities for business debt and related security documents
• Statement of assets and liabilities
• Summaries of retirement plan assets and benefits, including Social Security, deferred compensation, and any pensions
• All contracts of insurance on the life of any senior-generation owner, including policy owner, beneficiary designations, pledges or assignments, and in-force illustrations
• Family constitution, family mission statement, family employment policy, family counsel charter
• Family (charitable) foundation documents, donor advised fund contracts, or other collective charitable giving information
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Business Succession Planning & Legal Considerations

Businesses must plan in the event of a closing or transfer of ownership. Regardless of whether the owners can envision the end of the business, an exit strategy should not be ignored. Experts advise that succession planning should begin at least 15 years before the anticipated end or transfer of a business. An effective plan – whether it involves private shares transferred to a high-level manager, a leadership transfer to family members, or selling the business – safeguards a smooth transfer of the business from the current owners to the next generation.

Succession planning involves a company’s partners’ explicitly defining exit-related objectives for the business’ owners and then designing a thorough strategy for takeover. The strategy should take into account all personal, business, financial, legal, and taxation aspects of achieving the shareholders’ objectives. Objectives may include maximizing proceeds, minimizing risk, closing a transaction, or selecting new investors. The strategy should take into account plans for owners’ sudden illnesses or death.

• Determine a value for the business and each partner’s portion
• Purchase life insurance for all partners
• Determine the method of transferring the business
• Choose a successor

When a business decides it is time to cash out, the first step is to determine a precise value for the business, or a particular owner’s portion of the business. This can be accomplished in one of several ways. A certified public accountant (CPA) can appraise the business, or all partners can reach an arbitrary agreement. If part of the company consists exclusively of publicly traded shares of stock, the owner’s interest will be determined by the stock’s market value at that time.

Once a dollar value is established, the business should purchase life insurance for all partners. Thus, if a partner dies before leaving the partnership, the death proceeds will be used to buy the deceased partner’s share of the business and disperse it among the remaining partners.

There are several methods of transferring a business. A cross-purchase agreement is formed when each partner takes out a policy on each of the business’ partners. Each partner is both the owner and beneficiary on the same policy, so that when one partner dies, the value of each policy is distributed to the enduring partners, who will use the proceeds to buy the deceased partner’s portion of the business at a previously determined price.

In an entity purchase agreement, the business purchases an individual policy on each partner, and the business itself becomes both the owner and the beneficiary of the policy. At the death of a partner or owner, the business uses the policy earnings to acquire the deceased person’s portion of the business. The cost of each policy is generally deductible, so the business absorbs all of the costs and guarantees equity among partners.

Sometimes insurers carry first-to-die policies, meaning that one policy will cover all the business owners. These policies can be less expensive because only one death is insured. For example, Jennifer, Tom, and Sam establish an ice cream shop and take out a first-to-die policy for the value of one-third of the business. When Jennifer dies, their ice cream shop gets the insurance proceeds. Tom and Sam use these proceeds to buy out Jennifer’s portion of the business. Tom and Sam then own the business 50-50.

Choosing a successor is a crucial aspect of succession planning. Many business owners find it useful to seek advice of the board of directors or of a search committee. Specialists recommend that the chosen successor be immersed in the company’s critical functions before the transfer. It is also recommended to set up a timetable for shifting the company’s control.

Business succession planning requires thorough preparation. Business owners seeking a smooth and equitable division of their interests when they close the business should seek assistance from a lawyer.

Last reviewed October 2023

Estate Planning Legal Center Contents   

• Estate Planning Legal Center
• Business Succession Planning & Legal Considerations
• Estate Tax Law
• Family Limited Partnerships & Legal Implications for Estate Planning
• Prenuptial and Postnuptial Agreements Under the Law
• Charitable Giving & Related Legal Issues
• Powers of Attorney Under the Law
• Guardianships of Minor, Elderly, and Incapacitated Persons Under the Law
• Social Security Disability Benefits Under the Law
• Social Security Benefits Under the Law
• Trusts & Their Legal Significance
• Probate Law
• Wills — Legal Requirements & Limitations
• Protecting Unmarried Partners Through Estate Planning & Related Legal Strategies
• How Second Marriages Can Legally Affect Estate Planning
• Retirement Plans and Pensions in Estate Planning & Legal Concerns
• Working With an Estate Planning Lawyer
• End of Life Decisions & Legal Implications
• Estate Planning Legal FAQs
• Estate Planning & Probate Legal Forms: 50-State Resources
• Find an Estate Planning Lawyer

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• Estate Planning Overview

Succession Planning for a Business

Adequate planning can ensure your business will be preserved as you want it to be.

If you have your own business, you may wish to keep the business within your family or sell it, before or after you pass away. Regardless of which option you choose, careful planning will ensure the business can stay up and running and be protected from large, unexpected tax liabilities.

Does a business you own go through probate?

YES, all assets, including business assets, generally must go through probate (unless the assets allow for the naming of beneficiaries).

However, certain trusts ( GRATs or GRUTs ) can be established during your lifetime that will allow any subsequent growth of the trust assets to pass outside of your taxable estate. It is important to consult with an attorney and/or tax advisor about your specific circumstances.

It is advisable to consult an attorney or tax advisor with expertise in this area.

Special tax considerations

It's important to understand that the value of your business may continue to grow between the time you plan your estate and when you pass away, and that the taxable estate will include the value as of your date of death.

Leaving a business to co-owners

If your business has one or more co-owners, you might consider establishing an agreement that upon the death of any owner, their interest is automatically purchased by the other owner(s). Known as a buy-sell agreement , this arrangement can ensure that beneficiaries of the deceased owner (including spouses or other family members) don't unintentionally become owners. Life insurance can be purchased or an irrevocable life insurance trust (ILIT) can be established to cover these buy-sell agreements and provide necessary liquidity.

Creating a succession plan

At a minimum, a business succession plan should address the systematic transfer of the management and ownership of a business.

Management succession planning may include:

• Development, training, and support of successors.
• Delegation of responsibility and authority to successors.
• Outside directors/advisors to bring objectivity to the process (when necessary).
• Maximizing retention of key employees through equitable compensation planning for management, family/non-family employees, and active/inactive shareholders.

Ownership transfer planning considerations may include:

• Coordination between who will own the business and who will manage the business.
• Consideration of the best interests of the business and the owner's family.
• Timing of a transfer of the business during your lifetime. This may provide you with the opportunity to consult with the successor(s), and generally reduces the risk of a discounted sale of the business.

Steps to help minimize taxes and avoid probate

The gap between what your business is worth while you plan your estate and what it is worth when you pass away, as well as other liquidity problems, may be managed by creating an ILIT. If the ILIT is structured correctly, the benefits paid from the underlying insurance policy do not pass through probate and are available immediately, providing cash for estate taxes and other needs.

You may be able to transfer your business assets to your children and retain a source of income for yourself by establishing a grantor retained annuity trust (GRAT) or grantor retained unitrust (GRUT) . If the assets grow over the terms of the trust, the appreciation will not be subject to estate taxes, so these trusts can be effective tools for passing on a rapidly growing business.

To achieve the estate tax benefits of this type of trust, the trust must be structured precisely and you must outlive the terms of the trust. You may mitigate this risk by structuring an ILIT for wealth replacement to help offset the potential tax liability that would occur if you die before the trust expires.

Another approach is the family limited partnership or a family limited liability company . For example, you can form a limited partnership to hold the business assets. Some of the limited partnership units can be transferred to your successors, potentially eliminating the units from your taxable estate. Because limited partnership interests do not carry control of the partnership, the value of the transferred assets may be discounted for gift tax purposes. As with GRATs and GRUTs, family limited partnerships are subject to complex rules and it is advisable to consult with experienced tax and estate planning professionals.

Reviewing & updating your estate plan Keeping your estate plan up to date is just as important as creating it.

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grantor retained annuity trust (GRAT)

irrevocable trust that pays a fixed annuity to the grantor for a defined term, with the remainder of the trust passing to a noncharitable beneficiary

Estate Planning and Inheritance Glossary

grantor retained unitrust (GRUT)

trust that pays a fixed percentage back to the donor for a period of time; designed for the transfer of business or property assets and shifts future appreciation to children through the use of gift tax rather than estate tax

buy-sell agreement

for business with multiple owners; legal contract that stipulates the terms for remaining owners to purchase the interest of one that is departing

irrevocable life insurance trust (ILIT)

irrevocable trust funded with a life insurance policy and designed to exclude life insurance proceeds from the taxable estate while providing liquidity to the estate and/or the trust's beneficiaries; it generally cannot be changed once it is created

family limited partnership

partnership arrangement designed for the transfer of business, property, or other assets between family members, often from parents to children, in an effort to minimize estate tax liability and possibly provide protection from creditors

family limited liability company

entity designed for the transfer of a business, property, or other assets from parents to children to minimize estate tax liability and possibly provide protection from creditors

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Keep it in the family: succession planning for franchise owners

• Business Ownership

How a clear succession plan helps ensure generational continuity.

More than 90% of businesses in the United States are family owned – hundreds of thousands of them franchises – but only 30% of them survive the retirement of the original owner.

If you’re a franchisee and your goal is for a family member to eventually take over the business, you need a succession plan in place at least three years before you plan to retire – ideally, much sooner than that. You never know when the unexpected can happen and the successor will need to take over.

Implementing and executing a strong succession plan can help create generational continuity and enable you to enjoy your hard-earned retirement. While the core concepts of succession planning are similar for all family businesses, franchisees will have a few special considerations.

An important conversation

The first step toward succession is to have open and honest conversations with your family about the future of the business. These discussions can be uncomfortable – especially if family members have competing interests – but they are essential to implementing an effective succession plan.

A framework that might help you structure these conversations is to consider the why, what, how, who and when of the plan.

Why do you want to keep the franchise in the family? Your reasons for becoming a franchise business owner may have been to build long-term value and generational wealth – but often, the “why” extends beyond the family. Over the years, your business may have become a pillar of the community, reliably providing necessary products and services for your customers or clients. Make sure your family can identify these “north star” reasons.

What does the business look like now and in the future? Share your business roadmap with family members, along with information about your differentiators and investable assets. Are you hoping – and able – to expand your business into more units or even new concepts? How will doing so further your family’s values and financial objectives?

How do you want your business to be governed once you retire? Establish whether you plan to continue to play a role in running the business after you retire. Often, franchisors will not release the original franchisee from liability after the transfer.

Who will have a say on the future of the franchise? Determine and make clear which family members and non-family stakeholders will participate in the decision-making process once you retire, and what their involvement will require. The franchisor will need to approve your choice of successor and is likely to require they have certain qualifications, such as education, experience and business acumen.

When should all this happen? The sooner, the better. As soon as your children show interest in the business, start involving them in conversations about the business and, once they’re college age, consider including them in business decisions.

Another important consideration is your personal financial goals and retirement needs, and how your succession plan will accommodate your heirs.

The five steps of succession planning

With clear and open communication established within your family, it’s time to begin the process of implementing your succession plan.

You might choose to work with just a few family members to help decide on a successor, or you may want to bring in professional advisors, such as your attorney. It can be beneficial to do both: Ensure your family has a say, but also include business experts who understand what will be required of the person you ultimately choose.

From general intelligence and enthusiasm to highly technical abilities, determine the attributes, skills and experience your successor will need to have. Remember, franchisors will require the transferee to have certain qualifications – though they may be less stringent for family members.

With your advisors and criteria in place, it’s time to identify your potential successor. Doing so can be difficult if, for example, you have to choose one child over another, which is one reason business owners put off creating a succession plan. You might even find you have two strong candidates, in which case you may work with both of them to ensure one or both are prepared to effectively operate the business in your absence.

The franchisor has the right to approve or deny your choice of successor. It’s a good idea to get the approval in writing so there are no misunderstandings when the time comes to transfer the business. The approval will typically state any contingencies, such as the successor completing specific training programs.

It can take one to three years to prepare a successor, giving them time to complete any educational or other training requirements, absorb business knowledge and make the mistakes you can turn into learning experiences. Your successor might start their training by simply shadowing you, and gradually take on more tasks as you delegate them.

Not only does the transition period give your successor time to get acclimated, it also gives your employees, customers and other stakeholders time to develop confidence in your successor’s abilities and get comfortable with the change.  

Legal and tax considerations

Estate and liquidity planning is a critical component of your succession plan. Failing to consider the impact estate and inheritance taxes may have on your family could result in your heirs needing to sell the business to pay the tax bill.

It’s important to work with your attorney and CPA to help minimize the tax consequences for your family members – say, by using a vehicle such as a family limited partnership, trust, or buy-sell agreement. Be sure to check with your franchisor to get permission before implementing one of these strategies. 

Implementing and executing an effective succession plan can be a complex undertaking, which is another good reason to start the process early. But having a viable plan in place can help you and your family maintain business continuity and enjoy the benefits of your years of hard work.

Sources: Franchise.org, Franchisewire.com

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

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Small Business Succession Planning

Most small business owners plan to exit their business eventually, in one form or another. Maybe it involves family succession or maybe it’s just an outright sale. But either way, our next guest says having an exit plan from the very beginning is a wise idea. Mike Switzer interviews Jeremy Finger, a certified financial planner with Riverbend Wealth Management in Myrtle Beach, S.C.

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University of Washington Human Resources

Professional & organizational development, succession planning.

Succession planning is the process of identifying the critical positions within your organization and developing action plans for individuals to assume those positions. Taking a holistic view of current and future goals, this type of preparation ensures that you have the right people in the right jobs today and in the years to come.

In the long term, succession planning strengthens the overall capability of the organization by:

• Identifying critical positions and highlighting potential vacancies;
• Selecting key competencies and skills necessary for business continuity;
• Focusing development of individuals to meet future business needs.

A succession plan identifies future staffing needs and the people with the skills and potential to perform in these future roles. Professional & Organizational Development’s Succession Planning Toolkit will help guide you, though we strongly suggest you involve your assigned HR consultant and/or HR administrator in this process as well.

We’ve broken succession planning down into three phases with clear steps, and the Succession Planning Toolkit (PDF) comprises a series of worksheets that move you through the succession planning process. Within this document, you’ll find templates and tips for:

• Ensuring succession planning is closely tied to business strategy and goals;
• Understanding the importance of engaging executive and senior leaders in the process;
• Clearly defining the development of key talent; and
• Ensuring staff understand their role in the process and know what is expected of them.

Assessment phase

Step 1: Identify significant business challenges in the next 1–5 years.

Step 2: Identify critical positions that will be needed to support business continuity.

Step 3: Identify competencies, skills, and institutional knowledge that are critical success factors.

Evaluation phase

Step 4: Consider high potential employees.

Step 5: Select the competencies individuals will need to be successful in positions and to meet identified business challenges.

Development phase

Step 6: Capture the knowledge that individuals possess before departing the organization.

Step 7: Develop a pool of talent to step into critical positions through targeted career development strategies.

Access and print the entire Succession Planning Toolkit (PDF) .

Home » Insights » Taxes » How to Find the Best Entity for Your Business

How to Find the Best Entity for Your Business

Lead, Sr. Tax Manager

• May 23, 2024

Finding the right entity for a business can take some time to evaluate the pros and cons of different structures.

• Small Business , Business Owners

Entrepreneurs have several options when deciding on a corporate structure for their business activities. For example, many owners begin as sole proprietors and, as business and income grow, they later form a limited liability company (LLC) or subchapter S corporation (S-Corp). The goal when deciding on the best structure is often tax minimization and liability protection. There certainly isn’t a one-size-fits-all solution, but there are pros and cons to consider when evaluating the different types of entities.

Sole proprietorship

Individuals who start a small business often begin as single employees and report their income on their individual tax returns (Form 1040, Schedule C). Because the business structure only requires a Social Security number, sole proprietorship is considered the easiest and simplest to establish. Another advantage is the ability to make deductions for self-employed health insurance premiums paid and contributions to SEP individual retirement account (IRA) plans.

An important downside to operating as a sole proprietor is business assets are tied to personal assets, which can be a problem if the business is sued or fails. Legal liability also raises concerns when hiring employees because their actions could potentially come back and hurt the business owner. Hiring employees also means the employer needs an Employer Identification Number (EIN) for payroll tax reporting. Lastly, sole proprietors face Medicare and Social Security taxes on net income over $400.

Partnership

When two or more individuals or entities join to operate a business and share profits (or losses) the structure is sometimes called a partnership. The default type is a general partnership and allows like-minded entrepreneurs to pool resources, skills, and expertise with one or more partners.

Like a sole proprietorship, however, the partner’s business and personal assets are often tied together, which can be problematic from a liability perspective. That’s why some professionals (think doctors, lawyers, or accountants) operate under limited liability partnerships (LLPs), which can help shield them from any actions of the other partners. However, limited liability doesn’t mean their assets are protected from their own actions.

LLP vs. LLC

The limited liability company has many of the same characteristics as an LLP, but also some notable differences. Both are considered pass-through entities and profits (or losses) are reported on the owner’s income tax returns. Both LLCs and LLPs offer limited liability protection to their owners (called members in an LLC and partners in an LLP) and owners generally aren’t personally liable for the debts and obligations of the business beyond their investment in the company.

LLCs and LLPs have a lot of other things in common:

• An EIN is required.
• Partners or members can’t be on the payroll, but the company can have employees.
• LLCs and LLPs can be more costly than sole proprietorships because of separate return requirements.
• Partners and members receive Form K-1 to report their pro-rata share of income, deductions, and credits regardless of whether distributions are made.
• Ordinary income for general and managing partners is subject to ordinary and self-employment taxes.
• Limited partners and members shares aren’t subject to self-employment taxes.
• Losses are limited to basis (the amount invested), including share of partnership’s liabilities.

An LLC differs from an LLP in that it’s created by filing articles of organization with the state and the LLC operates as a separate business. By creating a financial barrier between the owner and the company, business creditors can’t go after an owners’ personal assets. Think of an LLC as a hybrid between a partnership and a corporation; it provides many of the same protections as a corporate structure but requires less paperwork and fees to create compared to corporation.

Corporation

While the idea of incorporating might seem daunting, subchapter C (C-Corp) and S-Corps are quite common structures for small businesses and often make sense for those consistently generating income of $75,000 or more per year. A key difference with the corporation (compared to a partnership) is the liability protection and tax treatment. Because a corporation is considered a separate entity, the shareholders’ (owners’) personal assets are generally shielded from company liabilities. Also, corporations are subject to double taxation, meaning income is taxed at the corporate level and distributions at the owner level.

Electing to be treated as a C-Corp involves filing specific forms and obtaining an EIN. Owners have discretion over payroll arrangements but face the corporate tax rate of 21% on net income. Alternatively, the second election is forming an S-Corp. Owners benefit from pass-through taxation and receive K-1 forms detailing their share of income, deductions, and credits, regardless of whether distributions are made. While ordinary income after salary is taxed at individual rates, it isn’t subject to self-employment tax for Social Security and Medicare.

While forming an S-Corp can help overcome some of the problems of double taxation, certain guidelines must be followed:

• Owners’ payroll is mandatory for profitable companies.
• Owners can’t be foreign.
• The number of owners is limited to 100.
• Losses are constrained to basis, including only direct shareholder loans to the company.

The bottom line

Entrepreneurs face a myriad of options when considering the most suitable corporate structure for their businesses. From the simplicity and ease of establishing a sole proprietorship to the complexities and protections offered by corporations, each entity type presents its own set of advantages and challenges. Finding the optimal structure often depends on the owner’s individual assets, long-term goals, and tax situation. Mercer Advisors has business planning specialists to help you make the right choice for your business.

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Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors.

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JPMorgan leaders shaping its strategy as succession comes into focus

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Reporting by Manya Saini in Bengaluru, additional reporting by Nupur Anand in New York; Editing by Lananh Nguyen and Arun Koyyur

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Fed's Bostic says U.S. not past 'worry point' for inflation

The Federal Reserve may need to wait longer to cut interest rates because even with April's slightly cooler inflation reading there is continued upward pressure on prices, Atlanta Fed President Raphael Bostic said on Thursday.

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Designing a Succession Plan for Your Law Practice: A Step-by-Step Guide for Preparing Your Firm for Maximum Value (Paperback)

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The insider's guide to selling a law practice, transferring ownership, and designing a great Life After Law, written by two of the top authorities in succession planning.

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Putting off succession planning could mean settling for less in the end

Caurie Putnam // May 23, 2024 //

Almost three-quarters of privately held companies in the U.S. plan to transition ownership within the next decade, according to the Exit Planning Institute’s 2023 National State of Owner Readiness Report , released in March 2024.

How should these and other organizations determine what the best kind of succession plan is for them and when should they begin the process? We spoke to four local professionals to find out.

“Don’t make succession planning the lowest thing on your priority list,” said Kelly E. Marks, a corporate and tax attorney who is a partner with Phillips Lytle LLP. “If the business is meaningful to you, if it is meaningful to your employees and if it is meaningful to your family, stay on top of the planning and don’t procrastinate.”

She says, acknowledging that business owners are incredibly busy in the day-to-day operations of the organization, that it’s important to remember that circumstances can change — sometimes abruptly — and that there are always events outside of one’s control.

“If you didn’t get to your planning, then you may be in a position to not transfer the business in the way that you wanted to,” said Marks, who notes a succession plan can take many different paths, including — but not limited to — selling to a third party, gifting to the next generation, or transitioning to a wholly owned private foundation.

The decision on which way to go is highly individualized for each business, but corporate and tax attorneys can be an important part of the team to help get the conversation started and continue the process, along with accountants, financial planners, investment bankers and estate planning attorneys.

When it comes to making the decision, “It really boils down to the personal goals of the business owner and the mission for the business going forward,” said David Dinolfo, CPA, a partner at The Bonadio Group and a member of the Investment Banking and Transaction Advisory teams.

Dinolfo notes that external buyers will generally pay a higher price than internal buyers, so if price is important to a business owner, they’re most likely going to get the best or highest price by testing the open market.

“If you’re a business owner who says, ‘I’ve taken this business as far as I can, I’m tired and I’m ready to retire, but I think if it’s in the right hands, it can really take off,’  usually those right hands are an external buyer who has the firepower and the ability to scale and expand markets,” Dinolfo said. “If growth and expansion is one of the more desired things for a seller, an external buyer is usually the best fit.”

If things like company culture and continued performance in the way the business has historically performed are most important to a seller, an internal sale may be more attractive, said Dinolfo, who added that an internal sale may also work well for a business owner looking to slowly exit.

When talking to an internal buyer or team of buyers, Dinolfo says business owners should consider whether that person or team has the financial wherewithal to make the purchase.

“If the answer to that is yes, it’s probably going to be financed and paid over time,” Dinolfo said. “It’s unlikely that the seller is going to be able to cash a check at closing and be done.”

• Securing the future: Building a robust succession strategy for your family business | Viewpoint
• Winning the succession planning game: Know your goals and leave plenty of time for process
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Russell D’Alba, CPA, the founder, president and managing director of Paramax Corporation, an investment banking firm, says most often business owners looking to exit are focused on optimizing the selling price.

“When they call us for advice, they usually start with ‘My goal is to sell the business for the highest number I can possibly get to someone reliable or a group of people or a private equity fund that’s reliable,’” he said. “And I usually then say to them, ‘How important is maximizing or optimizing the selling price?’ Nine out of ten times, they say that is the number one goal.”

D’Alba says when planning for an optimized sale of a closely held business, different scenarios he presents to sellers not looking to keep the business in the family include: a sale to a strategic buyer using a competitive process; a sale to a strategic buyer in response to a single strategic buyer’s inquiry; a sale to a financial buyer; a sale to insiders; and sale to an Employee Stock Ownership Plan (ESOP).

If an owner is not sure which way they want to go, D’Alba says it begins with him and his team being good listeners and going through an extensive interviewing process to understand the client’s goals and their timing. He says each business and industry is different and requires a highly customized approach.

“Our experience has been (that) a seller who is well prepared to go to market, and who uses an investment bank that runs a competitive process where there are multiple bidders, will find the best bidder won’t necessarily be the highest bidder,” D’Alba said. “The best bidder sometimes is the number two price, but they might bring other things to the table that cause the seller to feel more comfortable.”

Charles E. Telford III, a partner with Lippes Mathias LLP whose roles include being part of the Trusts & Estates team, says estate planning is an important part of a business’s exit strategy and that it’s never too soon to prepare.

“Every step of the way, whether you’re at the beginning, the middle, or the end, a responsible business owner is always thinking about what the exit strategy is for the business because there is some inevitability to it,” Telford said.

He notes that even if it is not a desirable topic to think about, it’s important for business owners of all ages to plan for what will happen to the business should they have a health calamity or die.

“Most of the time, these things are long-term projects,” Telford said. “You try to plan for the here and now, as best you can, and you try to anticipate as many reasonably foreseeable logical outcomes as you possibly can.”

For business owners that have not done estate planning yet or need to revisit it, Telford said it’s a particularly good time being that it’s a Presidential election year, which means the tax laws could change significantly post-election regardless of who wins.

Caurie Putnam is a Rochester-area freelance writer.

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At 75, NYC Ballet is getting older. Its audience is skewing younger — and that’s the plan

New York City Ballet’s artistic director Jonathan Stafford, right, and associate artistic director Wendy Whelan pose inside the lobby of the David H. Koch Theater at Lincoln Center, Thursday, Feb. 29, 2024, in New York. (AP Photo/Bebeto Matthews)

New York City Ballet’s artistic director Jonathan Stafford poses inside the lobby of the David H. Koch Theater at Lincoln Center, Thursday, Feb. 29, 2024, in New York. (AP Photo/Bebeto Matthews)

New York City Ballet’s associate artistic director Wendy Whelan poses inside the lobby of the David H. Koch Theater at Lincoln Center, Thursday, Feb. 29, 2024, in New York. (AP Photo/Bebeto Matthews)

FILE - Ballet dancer Tiler Peck attends the New York City Ballet Spring Gala at the David H. Koch Theater on Thursday, May 2, 2024, in New York. (Photo by Andy Kropa/Invision/AP, File)

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NEW YORK (AP) — Alice McDermott settled into her seat at New York City Ballet on a recent Friday night, excited to see her first-ever ballet performance. The 31-year-old Manhattanite, who works in recruiting, was on a fun girls’ night out with three friends she’d met through work, starting with dinner.

“They told me I’d love the ballet,” says McDermott, who was also excited to realize she was already familiar with one of the evening’s performers, Tiler Peck, via the dancer’s popular Instagram feed. “They said you can put on a nice dress and just immerse yourself in another world, whilst marveling at what the human body can achieve.”

Seems they were right: At the end of the evening, McDermott, a new fan, went home and watched a ballet documentary.

Perhaps you could call it “Ballet and the City”? Whatever the term for McDermott’s ballet evening with pals, the scenario would surely be music to the ears of the company — which has been celebrating its 75th birthday with fanfare this year — and especially its artistic leaders of the past five years, Jonathan Stafford and Wendy Whelan.

The two, both former dancers at the storied troupe founded by George Balanchine, have made it a key goal to bring in a younger audience to ensure the company’s long-term health — and more broadly, to guard the vitality of a centuries-old art form.

It seems to be working. Though some initiatives have been in place for longer, the last five years have seen a marked shift, according to numbers provided to the Associated Press: In 2023, 53% of ticket buyers were under age 50, and people in their 30s made up the largest age segment by decade. Five years earlier, in 2018, 41% of ticket buyers were under 50, and people in their 60s made up the largest age segment.

Now, longtime ballet followers note that on a bustling Friday evening you can look down from the first ring of the David H. Koch Theater at Lincoln Center and not simply see, well, a sea of gray.

`A GENERATION OF YOUNG PROFESSIONALS’

A major factor in attracting younger people, especially those under 30, has been affordable pricing. There are also evenings targeting young professionals, including post-show receptions. And there have been collaborations with visual or musical artists with youthful followings — like the musician Solange, who in 2022 was commissioned to score a ballet by 23-year old choreographer Gianna Reisen.

The Solange collaboration was a significant moment, Whelan and Stafford said in a recent interview, surveying the past five years as the thumping of leaping dancers’ feet echoed through the ceiling above Stafford’s office.

“We sold out every show,” Whelan noted. “It was a little nugget, but it was memorable.”

Perhaps even more important was the fact, says Stafford, that about 70% of those ticket buyers were new to the company — contributing to “a generation of young professionals in the city that are at our theater every night now.”

Katherine Brown, the ballet’s executive director, said the company had taken a look at the theater and vastly reduced the price of certain seats — and saw them fill up. She also noted the 30-for-30 program, where members under 30 can buy any seat in the house for $30. “That thing has just exploded,” Brown says, from some 1,800 members in the last full season before the pandemic-forced shutdown, to some 14,000 now.

One can’t discount the “pure economics” of an evening at the ballet, especially for young people, says Wendy Perron, longtime dance writer and former editor of Dance Magazine. “When I was in New York in the ’70s and ‘80s, I just couldn’t afford to go to the ballet,” she says.

GETTING BETTER ACQUAINTED

Also not to be discounted: the effect of social media in promoting dancers as people with personalities.

“We’ve got this crop of really exciting but also relatable, approachable dancers, and through social media, audiences can connect to them in a way they couldn’t back when we were dancing,” says Stafford, who retired as a dancer in 2014.

Consider Peck, one of the company’s most popular ballerinas (and a rising choreographer), whose Instagram feed had reached McDermott before she ever saw her dance. Peck supplies her half-million followers with short, punchy videos about everything from her 10 favorite dance roles to how she applies stage makeup. Her videos often feature her partner onstage and off, rising principal dancer Roman Mejia.

It’s all very different from a time when — like Odette in “Swan Lake” — ballerinas used to be mysterious and, above all, silent.

Social media — whether used by the company or via the dancers’ own feeds — can also answer questions. If you attended a performance of “The Nutcracker” a few seasons ago, you might have wondered why dancer Mira Nadon, as Sugarplum Fairy, suddenly disappeared from the stage at a key moment. The answer was on her Instagram later: Her pointe shoe had slipped off.

“See, you can get all your answers from Instagram now,” quips Whelan, who herself has an active feed.

ESTABLISHING A PARTNERSHIP

A few months ago, Whelan, a much-loved former NYCB principal who also retired in 2014, got a congratulatory text from Stafford in the morning — it had been exactly five years since the two had taken the helm after a turbulent period when #MeToo accusations caused scandal.

Historically, the company had been led by one man — Balanchine until 1983, then Peter Martins. This time, the board tried something new: a duet. Stafford was already interim head, and Whelan had applied for the job.

“They put us in a room and closed the door, and we were like – ‘Hi?’” Whelan says. “They were like, figure it out! And we did.” Stafford, the artistic director, serves as a bridge between the creative and business sides. Whelan, associate artistic director, focuses on the delicate task of programming.

Company insiders describe a mood different from the days when one outsized, all-powerful personality ruled from above. For one thing, the pair says they’ve instituted annual taking-stock conversations with each dancer.

Diversity — ballet is slowly changing but still overwhelmingly white — is also a priority, they say, and that includes diversifying “the pipeline,” meaning students at the affiliated School of American Ballet.

Recently, the company heralded its first two Black dancers to dance Dewdrop, the second most important female “Nutcracker” role: India Bradley and guest artist Alexandra Hutchinson of the Dance Theater of Harlem. Yet to come is a Black Sugarplum Fairy. The company says 26% of of its dancers identify as people of color, whereas 10 years ago that figure was 13%. Stafford and Whelan have commissioned 12 ballets by choreographers of color in the last six years, it says.

“We know where the gaps are, and we take it seriously,” Whelan says.

She and Stafford say they’re also paying more attention to wellness, be it physical training to avoid injury, healthy diets, or a more frank discussion of mental health.

As for the company’s financial health, it is strong, Brown says, four years after the pandemic cost tens of millions in losses The 2024 budget is roughly $102 million, compared to $88 million in 2019. Audience capacity has exceeded pre-pandemic levels.

As for new fan McDermott, she’s planning more visits, along with her friends.

“I think we have a new tradition between the four of us,” she says. “We’ll definitely be making it a bit of a thing.”