A Systematic Approach to Business Succession Planning

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Succession planning prepares the business, its owner, and the owner’s family for the day when the owner no longer participates in the operation. Without planning, that day can create crisis and conflict in both the business and the family, which clearly has adverse consequences both emotionally and financially.

Business succession planning includes developing an exit strategy for the owner and an ownership transition for the business. Whether the strategy involves transferring ownership and management responsibility to family members, fellow shareholders, or to a third party, it should address the following issues:

  • Providing financial security to the owner in retirement.
  • Promoting a smooth transition and continuing success for the business.
  • Treating all the owner’s children equitably, whether working in the business or not.
  • Mitigating exposure to the estate tax and avoiding other transfer costs.
  • Providing the owner’s family financial support in case of death or disability.

Transferring ownership in a business is unlike transferring ownership in any other asset. Often, a significant portion of a business’ value is attributable to the owner’s personal contributions, efforts and relationships. Without planning, the value of the business is likely to decline when the owner is no longer involved. This reduction can have an adverse effect on the owner’s financial situation. In the event the owner’s disability or death forces an ownership change, any decline in the business’ value can be financially devastating to the surviving spouse and family.

All business owners have an exit strategy, although they may not be aware of it. These strategies can be placed into the following categories:

  • Lifetime Transfer of Ownership and Management

The optimal succession plan usually combines a lifetime transfer of both ownership and management of the business to the owner’s successor(s) with a contingency plan that becomes effective if the owner prematurely dies or becomes disabled. The contingency plan is updated periodically to reflect the changing circumstances of the owner’s dependents.


A lifetime transfer of business ownership and management responsibility allows the owner to guide and mentor the successors during the transition process. Usually, the existing owner is the best person to facilitate these transitions. The owner’s involvement in the transition can also inspire the confidence of employees and key alliances.

  • Using the Estate Plan to Implement the Exit Strategy

While transferring ownership and management responsibility during the owner’s life is optimal, many owners have no intention of retiring. Some business owners are not ready or able to address all the family issues that are encompassed in a lifetime exit strategy, fearing that their succession decisions will cause family tensions. These owners often adopt an exit strategy that uses their estate plan to transfer business ownership at their death.


Even though the ownership and management succession will not take place until the owner’s death, this is still a planned succession strategy. As a result, the owner must decide who will acquire the ownership interest and how it will be transferred.

  • Letting the Heirs Worry about It

This plan has the most negative impact on the owner’s survivors and the business. At the owner’s death, ownership in the business is transferred under the terms of the owner’s will. Thus, ownership may be transferred to various heirs who may not be willing to work together. Ownership may be so fractionalized that decision-making becomes either very inefficient or even impossible, crippling the business. The failure to plan for management succession alone may result in the failure of the business. Failing to give any thought to who will own and manage the business after the owner’s death will likely result in the business failing or declining drastically in value.

WHY EVERY BUSINESS OWNER NEEDS A SUCCESSION PLAN

Like most people, business owners are usually concerned about their own financial security, providing for their loved ones, and keeping their family happy. However, closely held business owners often have the additional concern of keeping the business successful after they are no longer running it, since they (or their family members) often depend on the business to provide continuing financial support. Even if the owner and family are not financially tied to the business after transferring ownership, the owner may have personal reasons for wanting the business to continue. A sound succession plan addresses the goals that business owners have for themselves and their family. It can also enhance the value of the business by making it less dependent on the talents of the owner. This allows the owner to transfer ownership in the business without its declining in value as a result of the transfer.

  • Financial Security in Retirement

Some business owners anticipate and plan for their retirement. Others cannot envision life without the business and have no intention of retiring. Even those who have no intention of retiring must realistically acknowledge that circumstances beyond their control may force them to stop working at some point. An exit strategy ensures that the owner and his family will be able to withdraw adequate financial resources from the business at the owner’s retirement, whether voluntary or not.


The amount of financial resources available to the owner (or his family) when the owner is no longer working will be limited by the business’s value. Planning for ownership and management succession actually enhances value because planning minimizes potentially costly disruptions and disagreements that can take place when the transition happens without preparation.

  • Providing for Dependents

Most owners are concerned about providing financial security for their spouse and children during their life and after their death. A closely held business often represents the owner’s most significant asset. Planning for the transfer of ownership and management control can ensure that the value of that asset is preserved for the owner’s dependents.


Planning for management succession can significantly enhance the business’s value and maximize the wealth transferred to the owner’s dependents. Without planning, it is very likely that the value of the business will decline because the management successor is inexperienced, unprepared, or not well received by key employees, customers, suppliers, or other important third parties. Also, a sound succession plan minimizes estate taxes on the business and provides liquidity to the owner’s estate. In addition, the succession plan can be structured to minimize income taxes on business income or the eventual sale of the business. Both measures preserve cash resources and enhance the financial security of the owner’s dependents.

  • Ensuring the Business’s Continued Success

A closely held business is usually more than a way for the owner to make a living. A business often gives the owner power and prestige in the community. It can also represent the owner’s legacy to his children, both financially and in terms of family identity. In addition, many owners have strong loyalties to employees and customers with whom they have worked for many years. Thus, ensuring the business’s continued success is often a very high priority for the owner.


Planning for transitioning management responsibility is critical to the business’ survival after the owner retires or dies and is an integral part of any succession plan. Planning for management succession ensures that the owner’s death or retirement will not disrupt business operations, as the management successor is prepared to step in immediately and make business decisions. Also, sound planning for management succession includes introducing the potential management successor to key third parties such as customers, suppliers, and bankers. This enhances those parties’ confidence in the management successor and allows him to carry on “business as usual” rather than having to prove himself.


Finally, a sound succession plan balances the needs of the business with those of the owner, which helps ensure that the business is not adversely affected by actions designed to benefit the owner. For example, plans for the owner to withdraw cash after retirement are evaluated not only by whether those payments satisfy the owner’s liquidity needs, but also by their impact on future business operations. This helps ensure the business’ continued viability after the owner’s departure.

  • Promoting Family Harmony

Succession planning involves communicating to each family member his or her place in the business. Transitioning management responsibility and ownership in a family business may cause the owner to make some painful choices. However, a planned transfer also forces owners and their family members to discuss their goals with respect to the business. Communicating these goals to each other ahead of time is ultimately much less painful for family members than spending a lifetime hoping their parent’s plans for them in the business match their own. Without any succession planning, family members often find out about the owner’s plans for management and ownership succession after he passes and has no chance to explain his actions, which can be devastating.


When the owner has multiple children (especially if some are active in the business and some are not), planning to transfer ownership in the business can avoid pitting the active children against the inactive children. Solutions can be created to transfer wealth equitably among children who are active those who are not to avoid conflict and promote family harmony. 

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