Who Takes Over When a CEO Passes 

For many entrepreneurs, the thought of relinquishing control of their company or even contemplating a future beyond their leadership provokes anxiety. Yet, ignoring succession planning poses significant risks to the continuity and prosperity of businesses.

Why Business Owners Put off Succession Planning  

The reluctance of business owners to engage in succession planning stems from various factors. Trust issues and the absence of a suitable successor often top the list. Sometimes, the emotional attachment to one’s creation coupled with the fear of the unknown can paralyze decision-making processes. Often, owners simply don’t know where to begin and who to rely on for advice. However, postponing succession planning can have far-reaching implications for every stakeholder, from family to employees to clients. This article covers succession planning basics, from the reasons that business owners should begin planning sooner rather than later, the benefits and risks of succession planning, and legal arrangements that business owners may want to consider to help ensure an orderly transition.

Risks of Inadequate Succession Planning 

Businesses often serve as the primary source of income for families. Without a succession plan, the sudden absence of leadership could jeopardize financial stability. In addition to current income needs, family members may have built their livelihoods and future plans around the business, leading to disruptions if succession isn’t adequately addressed. 60% of failures in a family business are due to communication issues and a lack of trust. Without creating a succession plan and clearly communicating it to the relevant family members, a family may be hamstrung when it comes time to take over and operate the business, and unsaid expectations can create serious conflicts.

There are many more stakeholders in businesses than just the owner and their family. Employees rely on the business for their livelihoods. A sudden leadership vacuum can destabilize their financial future. Additionally, clients rely on the business’s services. It can be ethically questionable to forgo succession planning when clients rely on your services, especially for businesses that provide certain healthcare, financial, or legal services.

Benefits of Succession Planning  

Overcoming the apprehension surrounding succession planning provides many benefits. A well-crafted succession plan can assist with the continuation of the business’s legacy and vision, maintaining its identity and values. Thorough succession planning is an opportunity to fine-tune your business strategy. Outlining succession can help alleviate stress by identifying and mitigating other risks and blind spots in a business. Do you have the right talent in place? Do you need to give development opportunities to key employees, or if leaving the business to family, do you need to train your family members now? Do you need to improve your recruitment efforts? Clear succession plans can help ensure your staff is ready to execute your vision, and they reassure key employees about their future within the company, reducing turnover.

A transparent succession plan also mitigates potential conflicts among family members, preserving harmony and relationships. Working with the right attorneys, CPAs and tax planning groups can save money on the tax of the sale of the business. Succession planning fosters open communication channels, enabling family members to align their expectations and career aspirations. By delineating clear goals and strategies, succession planning facilitates the seamless execution of a founder’s vision.

Formalizing a Succession Plan  

Succession planning is likely to involve some documentation that allows for the transition of ownership. While there are upfront costs to consider, working with an attorney and financial advisor to create a formal transition plan can help to solidify that your intentions are carried out on your terms. Here are some vehicles that business owners should consider when seeking to preserve their business, its stakeholders, and its legacy –

Trusts: One of the common first steps in succession planning is to help ensure the business’s legal continuity by establishing an appropriate trust vehicle. Business owners have several options for trusts that can be used in succession planning. A well-known option is the Revocable Living Trust, which allows the transfer of ownership of business assets to the trust while the owner retains control. The trust can be modified or revoked by the owner as needed.

Other types of trusts may be better suited to a business owner’s specific succession planning needs. For instance, business succession planning and estate tax issues may be addressed together through a premium finance life insurance policy, which can be used to buy a deceased owner’s business share from their estate. A properly set up Beneficiary Defective Inheritance Trust or Dynasty Trust with qualified estate planning professionals can minimize tax liabilities upon the sale of a business and allows some control on making future decisions.

Family Limited Partnerships: An alternative to a trust, a Family Limited Partnership (FLP) is a partnership structure that allows a business owner to transfer business assets to family members while retaining control as the general partner. Limited partnership interests can be gifted or sold over time, facilitating succession planning. FLPs may cost more than a trust to set up and maintain, but the structure allows for gradual ownership transfers over time, promoting continuity and succession planning, and FLPs are taxed as pass-through entities, which may result in tax savings.

Employee Stock Ownership Plans (ESOPs): Establishing an ESOP may not be front-of-mind when starting a succession plan. However, for owners seeking to plan for retirement or to exit the business, implementing an ESOP can provide an effective and structured way to transition ownership over time. This can align employee interests with business success, offering a smooth transition path and serving as a retention tool for key employees. ESOPs may also offer tax advantages. For owners looking to retire or exit their current business, an ESOP can provide liquidity during a transition phase.

Beyond the specifics of business succession planning lies a broader concept: comprehensive legacy planning. This encompasses creating wills, planning for estate tax mitigation, and meeting the needs of individuals seeking to safeguard their financial legacies. Succession planning isn’t merely a corporate formality; it’s a strategic imperative for business continuity and legacy preservation and should be viewed comprehensively with broader legacy planning. Addressing the challenges of planning for a business’s success after an owner’s departure can contribute to a smooth transition while upholding the vision and values of the company and its founder for generations to come.

Written by Shawn Goheen.

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