Succession planning refers to the process of determining how your business will continue as you become less involved in, or leave, the business. A good way to think of it is that "succession planning" is like estate planning for the business entity.
This post will provide an introduction into some of the key items you'll want to bear in mind when you start the process.
Succession of Key Roles
Obviously, the primary goal is to aid in the continuation of the business as its founders begin to retire or otherwise leave the organization. For this step in succession planning, the goal is to identify what their duties are, which employees or other constituents are best placed to succeed those individuals, and what steps need to be taken in the meantime.
For example, let's say you have salesman who is just stellar at his job. Right now, his duties are solely sales. You, as both president and sole shareholder, decide that he would be a good successor for you as president. Although he could still be involved in sales, he would be taking over an administrative role, and he may need to hire someone to make up for the lost volume of sales.
A good place to start might be to give this salesman some administrative responsibilities, perhaps an officer position (for example, Vice President of Sales), and let him take the lead in the hiring process for the new salesperson.
Adding Business Partners
The business will need new ownership as you step out of your active role. Of course, you don't have to hand over the reins overnight. You can start by selling equity to employees, directors, or others in small amounts so that you retain control while giving those individuals a concrete interest in the business.
For example, you own a corporation. You are the president and sole shareholder. But you have an employee who has been with your corporation for years, works hard, and you think would be ideal to take over after you. But you are concerned that they might be exploring other options. You might want to consider giving this employee equity (shares in the corporation). This gives them a stake in the business as they would be an owner. And by transferring small amounts of shares (perhaps 15% over a 3 year period), you maintain control of the business until you're ready to hand it over.
Life Insurance
Apologies if your eyes glazed over at the word "insurance." So let me ask it like this: what if you die? 1) Does your spouse (or soon-to-be ex-spouse) get your shares? 2) What if you've been running the business for 50 years, and the only other shareholder has been in the business for 5 years? 3) What if your children are supposed to take over the business, but they're too young?
Life insurance, especially what is called "keyman" or "key person" insurance, is critical for businesses to have the capital they need to continue. In the examples above, insurance could have 1) given the business funds to either buy back the shares from (or settle with, in the event of a lawsuit) the spouse, 2) given the business capital for the relatively new owner to make investments in developing his knowledge or skill without the added pressure of potentially failing right off the bat, and 3) it gives the children (or, hopefully, a business adviser to the children) the ability to hire experienced people to run the business.
Corporate Records
Your corporate records will need to reflect if (or, hopefully, when) you adopt a buy-sell agreement, shareholder agreement, or other contract mandating how interests will transfer. Depending on how those documents are drafted, you might need to re-order share certificates to reflect any language required by those agreements. And any official entity decisions related to succession planning should probably be included at annual or special meetings.
Conclusion
Succession planning is the process of preparing for your departure from the business. The sooner you start thinking about how that will happen, what documents you need, what individuals to include, the better.
Comments