7 minute read

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

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

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:

  • Retire

  • 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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