Why Succession Planning is Important

July 25, 2023

Business succession planning is a crucial, but often overlooked, element of business ownership. Many business owners are so focused on growth and maintaining company success that they never have time to consider what will happen to the business after they leave or retire until the time comes.

A business owner may ask “Why is succession planning important if I’m not going to retire for several years?” While successful transitions can and do occur with little forethought or preparation, having a succession plan in place eliminates risk, worries, and confusion when the time arrives.

What is Succession Planning?

A business succession plan is a legal document that guides a business through a change in ownership. It covers the logistics of ownership transfer, as well as the accompanying financial decisions that will need to be made about the transfer.

Succession plans require conscious thought and decision-making about what happens to a business when the principal owner(s) exits the business, whether planned or unplanned. A well-defined succession plan will provide step-by-step instructions for the sale and leadership transitions of the business. Ideally, the succession plan will benefit all parties involved including the owner and family, the employees, the successor, and the business itself.

Why is Succession Planning Important?

Succession planning is important from an operational, as well as an emotional, standpoint.  Succession planning ensures the owner’s business continuity wishes are respected. It also provides peace of mind to the owner’s family members, employees, shareholders, investors, and customers.

Knowing that there is a plan in place for the successful transition of the business can greatly ease any worry the changeover may cause these interested parties. This ease of mind and clarity can help reduce staff turnover and investor pullbacks, which in turn will ensure business continuity and help maintain  the business’s stability during the transition.

What are the Benefits of Succession Planning?

Although succession plans are most often associated with an owner’s retirement, they are useful even from the earliest days of the business. They ensure business success in the event of an unexpected disability, illness, or death among the ownership.

If you are wondering if your business needs a succession plan, ask yourself, “What would happen to my business if I was unable to run it?”

Would the business survive? Is anyone available to take over the day-to-day operations? How would your family or employees be affected?

Answers to these questions are only some of the benefits of succession planning.

Succession planning is important especially for businesses that have:

  • Employees beyond immediate family members
  • Repeat or ongoing contracts with clients
  • A successor in mind
  • Complex systems on which the successor will need to be trained

In general, the larger or more complex your business, the greater the need for a business succession plan, regardless of how close the owner is to retirement.

Succession Planning Options – Ways to Sell or Transfer Ownership of Your Business

There are several options for selling or transferring ownership of a business. To ensure that your company is able to gain the benefits of succession planning, the four most common methods are briefly outlined below.

  1. Sale to an ESOP. Employee Stock Ownership Plans sell the business to your employees. Owners sell their shares of the business to an ESOP trust which holds those shares on behalf of employees. Shares are allocated to employees as they become available as part of their employee benefits package. There are strict legal requirements that govern ESOPs to protect employees and owners. This option is very popular for family-owned businesses and those that want to encourage an ownership culture. There are also significant tax benefits to the ESOP owned company and owners who sell to an ESOP.
  2. Sale to Strategic Buyer. Strategic buyers are industry specific. A buyer may be a competitor looking to expand or a business who sees the value of your company. Strategic buyers may be willing to pay more than the business value just for the opportunity to own it. It is important to have an experienced mergers and acquisitions attorney representing your company in order to mitigate your exposure risk if the deal falls through. Without these protections, a would-be buyer could walk away with vital insider information about your company.
  3. Sale to a Financial Buyer. This is the most common type of business sale. These are outside buyers who are usually financing the purchase with a bank loan. They will usually pay fair market value or close to it, and they may want you to stay on during the transition period. Buyers may even ask you to retain some equity in the business or finance some of the purchase price. Private equity firms, small groups of independent buyers, and individuals all make up this group of buyers.
  4. Sale to family or other shareholders. Partners or family members may want to buy the business. In a partnership situation, a buy-sell agreement might already be on hand from when the business was formed. Passing the business on to an heir or selling it to a family member is popular with family-owned businesses With this type of sale it is particularly important to establish a succession plan that clearly delineates who will take over the business, what role other family members will play in the business, how and when the transition will occur, and what the future leadership structure will look like. Without a plan, your business may face legal challenges to both the business’s transition and basic operation.

How Aegis Trust Company Services Can Help

Aegis Trust Company is an ESOP transaction trustee. We help owners establish ESOPs, create succession plans, and manage the transition process. As an ESOP fiduciary trustee, we manage plan assets and monitor plan performance as an independent third-party on behalf of plan participants.

To learn more about ESOPs as a succession planning option or our services as an ESOP trustee, contact us.

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DISCLAIMER: The Articles displayed on this website do not constitute legal advice, nor do they substitute for the advice of qualified professionals. While the Articles displayed on this website are designed to provide information regarding the subject matter covered, we cannot guarantee the accuracy of any statements contained therein. If any legal advice or expert assistance is required, the services of qualified professionals should be sought.

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