Why Succession Planning Matters

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Many people make detailed plans to take care of loved ones and handle their personal affairs in the future, using legal tools such as wills and trusts. For business owners, there are additional considerations to make when figuring out how to sustain their business once they retire, become unable to manage the day-to-day operations or need to step away.
This is where succession planning comes in.
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What is succession planning?
Succession planning involves choosing and training certain employees to replace company leaders and those fulfilling key roles in order to provide a smooth transition if and when those employees depart.
Consider your succession planning options
There are several ways to exit a business and understanding your options can help you make the most suitable choice for your company.
Pass the business along.
Explore a merger or acquisition.
Pursue an “acquihire.”
Consider an employee buyout.
Sell your stake to a partner or investor.
Go public through an initial public offering, or IPO.
Liquidate the business.
File for bankruptcy.
If you decide that passing the business along is the optimal solution, it makes sense to consider succession planning to maintain the health and performance of the business as you keep it running for the long term.
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Succession planning process
Here’s a general overview of the steps included in succession planning:
Review the company’s mission and vision to help identify vital roles.
Determine the target attributes and experience of ideal candidates for those roles.
Establish a pipeline of talent, either internally or externally.
Interview candidates and select successors.
Communicate succession plan to all stakeholders, employees and customers.
Plan and implement training and development processes for each role.
Why succession planning matters
There are many reasons why succession planning is important and can help organizations protect against business risks.
To maintain business continuity and drive results
Even if something unexpected happens, a business must continue to operate and deliver to customers without disruption. Having a succession plan can provide backup and seamless transition during these times, which aids in decision-making, keeps projects running without a hitch and ensures deadlines are met.
Many businesses consider purchasing key person insurance to cover their most valuable, essential employees. The death benefit from the insurance policy can assist with business costs and bridging the gap during the replacement period.
To give the company direction and motivate employees
Succession planning demonstrates to employees that there is a long-term plan for the business and potential for advancement down the road. This can motivate employees and enhance overall company morale and productivity.
To potentially save on costs
According to an analysis by the Harvard Business Review, poorly handled CEO and C-suite transitions cost S&P 1500 companies — those are the U.S. companies that comprise the S&P 500, S&P mid-cap 400 and S&P small-cap 600 — close to $1 trillion a year. Having to abruptly fill a vacant position can lead to higher costs related to recruiting and wooing hires, no matter your company's size.
To transfer ownership along with responsibilities
Besides having someone to step in when needed, succession planning often includes the transfer of business ownership along with the transfer of responsibilities.
Often, the beneficiaries of a key employee might not be suited to own and run the business. In this case, a business owner can set up a buy-sell agreement with other co-owners of the business to buy out one another’s share in the event of disability, bankruptcy, retirement or death.
A business owner’s interest is considered an asset, which means that it will likely need to pass through probate. However, using an irrevocable trust — such as a grantor retained annuity trust and/or irrevocable life insurance trust — can help ease the complexity surrounding these situations.
A GRAT can remove future appreciation of the business from the owner’s estate, minimizing gift and estate taxes when transferring assets to heirs. An ILIT can own a life insurance policy for the business owner. With the trust as owner, it separates the death benefit proceeds from the business owner’s personal estate, possibly minimizing any estate tax hit. The ILIT also provides the business owner’s heirs with more immediate liquidity or access to funds to cover business expenses until a suitable buyer for the business interest can be found.
Member FDIC | Member FDIC | Member FDIC |
---|---|---|
APY4.25% With $0 min. balance for APY | APY4.00% With $0 min. balance for APY | APY3.60% With $0 min. balance for APY |
BonusN/A | Bonus$250 Earn up to $250 with direct deposit. Terms apply. | Bonus$200 Requirements to qualify |
As a business owner, personal and business affairs are often intertwined. Consulting with estate planning attorneys as well as tax and financial advisors ahead of time can help you find the right solution to ensure that your personal and business succession plan will be in order and arranged in a manner that achieves your ultimate goals.
This article is meant to provide background information and should not be considered legal guidance.
