Create an effective business succession plan: a checklist for passing the torch

It’s crucial to always think ahead and have a plan for the future, just in case something unexpected  happens. Knowing there’s a strategy and blueprint for the what-if moments is one way people can feel at peace and in control. And, the same is true for a business. Whether you’re the business owner of a family-run operation that makes its decisions around the dining table or a department head at a growing enterprise that deliberates in a fancy boardroom, you need a business succession plan.

Looking at the leaders and managers with a tactical lens can keep a business from experiencing financial loss or production gaps if someone from management (or a small business owner) leaves for whatever reason. A business is nothing if not a combination of talented people who make important decisions that keep business or farm running. When one of those people (including yourself) steps down, planned or unplanned, you’ll need a plan to help the successor pick up operations where they left off with minimal disruption. 

Businesses or farms of all sizes should have a business succession plan to ensure operations continue smoothly during a transition in leadership.

Let’s look at business succession planning and what’s needed to build out a business succession plan for your own business. 

What Is a Business Succession Plan?

Succession plans are documents containing information about any critical positions within an organization and any action steps individuals who are taking over those roles need to follow. This type of preparation ensures that you have the right people moving into the job and guarantees that they have the necessary data to make it a successful transition.

A business succession plan generally involves a few essential elements:

Key Positions

Depending on your organization’s size, you may have one or multiple key employee positions that need to be planned for. You should sit down with your team and determine which roles should have clearly outlined the next steps in the case of a vacancy.

Necessary Skills

Once the applicable jobs have been selected for succession planning, it’s crucial that the current people in those roles specify and highlight the skills and competencies the next person must have to successfully transition into the job. This will help the business to continue running smoothly no matter who’s in charge.

Data and Documents

One of the most important parts of succession planning is gathering all critical information about the role and documenting any relevant data or knowledge that can assist the next person. This could include:

  • A long-term strategic vision for the business.
  • The organizational structure of the business.
  • Tax documents or financial records.
  • Estate planning information.
  • Bylaws.
  • Operating agreement or partnership agreement.
  • Ownership, equity or stock agreement.
  • Shareholder data.
  • Employee benefits and health care information.
  • Unpaid business loan information.

The Importance of Succession Planning

You may have heard the popular phrase, “If you fail to plan, you plan to fail,” so why are so few businesses taking the necessary steps to future-proof their organization? According to Deloitte, regarding a typical family business, only 30% survive into the second generation, 12% make it into the third and only about 3% operate into the fourth generation and beyond. This is most likely due to a lack of planning and preparation for how the business will function once the original head of operations is gone. If you avoid planning for the what-ifs, your company may not get a second chance to bounce back and find success.

We do understand why it may seem unnecessary to document a strategy for the next person to take over. You may either feel confident that you’ll stay at the company for a while or you believe the next person won’t need your thoughts and processes laid out in writing. But, sadly, things can change at a moment’s notice and it’s always better to be prepared — even if you think it’s not entirely needed.

If you go through the business succession planning process, you’ll most likely experience the following benefits:

Know Who Will Be the Best Fit

Whether you’ve already selected your successor or will need to find someone in the future, thinking through the skills and experience necessary for the job will help you and your team thoroughly understand who may be the most suitable to take over. It also allows you (or the current leadership role) to be part of the selection process — and, who knows the job better than the person currently doing it?

Have a Structure for Training

By laying out any potential abilities or important tasks that must be captained by the person who’s in line to take over, your team can provide a solid blueprint for training and development when that person is hired. This ensures there aren’t skill gaps in the transition from one person to the next.

Plan for Long-Term Success

Change can happen quickly. By taking steps right now, you can ensure that your company is prepared for whatever happens in the future. As you think about your financial goals for the next few years, anticipate how you or your leadership team’s positions can impact those aspirations for the better. Then, write down everything that you do for your job and any information you can provide that can ensure the business doesn’t get thrown off-course by a change of staff.

Succession Checklist: Creating a Future-Thinking Plan

Creating a succession plan is necessary for business owners, essential employees or people in critical positions within a family business or corporate organization, and now it’s time to get make your own. But, where exactly should you start? Follow these steps to smoothly map out your successful transition:

1. Know How the Structure of Your Business Affects Its Future

If you’re the sole proprietor of a business or farm, you and the company are basically one and the same. It’s not a pleasant thought, but if you meet an untimely end, so does your business. Its assets will essentially be liquidated and used to pay off any debts. Any money that’s left over will be distributed based on the terms of your will.

If you know that you want your business to thrive long after you’re gone, then it may be in your best interest to register it as an LLC or a corporation. This setup gives you more options in terms of transferring your stake in the business onto a beneficiary should you pass away, become unable to work or choose to go into retirement. 

2. Appoint a Willing Successor Before You Actually Need To

How easy this task is varies depending on the type of company but tends to be more challenging for small and medium-sized businesses and family-owned companies. A corporation owner or department head may have a management staff that it can choose from when considering a successor. A family-owned farm, on the other hand, may have a smaller pool of talent if it intends to keep the business in the family. Either way, it’s important to figure out what will become of your business after you or one of your partners is gone before you have any intention of leaving.

3. Consider the Financial Implications of Your Decision

Transferring your interest in a company onto a beneficiary may leave you or the recipient liable to certain taxes such as gift tax or estate tax. Consequently, it’s critical to figure out exactly how you intend to transfer the company to someone else and whether you have adequate financial resources to cover any taxes that come with it.

This is where estate planning can get a little bit complicated. There are plenty of possibilities available — using a life insurance policy to cover estate and/or gift taxes, reducing the taxable assets by selling to a future leader below the company’s value or having the successor outright purchase the whole company — but the prime option for you will ultimately depend on your circumstances. Your best course of action here is to get in touch with an attorney or tax advisor to assess your options.

4. Document Your Business Strategies, Policies and Processes

Whether you’re one of the main business owners or in charge of a specific department, clearly and formally document your strategies, policies and procedures — both for day-to-day functions and for emergency situations. Ideally, if you’ve proactively scouted out your potential successor(s) ahead of time, they will already be familiar with the mission and the work that needs to be done. Either way, it’s crucial that you have a documented template, at least on a high level, for how you do what you do. This will make it much easier to transition operations onto successors without rocking the boat or disrupting the customer or client experience.

Develop Your Succession Plan With Help

Succession planning isn’t simple, and you’ll need a lot more than this high-level guide to cover all your bases. However, it’s one of the most important — and yet most often-overlooked — aspects of being a company owner or decision-maker. And, you don’t have to do it alone. Bank Midwest offers industry advice and aid for all types of business structures, and we can assist you with your succession planning.

Ready to create a business legacy that will withstand the test of time? Get in touch with the experts at Bank Midwest today. Our trust officers or insurance agents can help you plan for the future transition of your business. 

Post updated. Originally published June 2020. 


Are you looking for more advice for protecting and growing your dream business? Listen to Dream, Plan, Live: the Bank Midwest podcast for more tips from the business experts in your community and at Bank Midwest.


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