When you work for someone else, leaving the company is as simple as giving your notice or announcing your retirement. But when you own a business, leaving is a little more complex. You need a plan, and ideally one that’s been in the works for a very long time.

When you build a business succession plan, you build certainty for yourself and your business. And by plotting out your plan over a long time horizon, you create continuity, which can give you more than peace of mind — in some cases, your clients may demand it.

“A business succession plan can provide an important road map for the continued success and financial viability of your company,” says John Muth, senior director of Advanced Planning at Northwestern Mutual. “It makes clear who will take over the business from you and under what circumstances. It stipulates how ownership will be transferred and at what price and terms, helping to avoid disputes. And, when you finally decide to stop working, it can help ensure that you’ll have access to sufficient funds to enjoy the lifestyle you want for the future.”

How do you build a business succession plan? Muth suggests that a well-crafted business succession strategy begins with a handful of strategic decisions.

  1. START EARLY

    “The time to create a business succession plan isn’t when you’re about to hand over the keys and head out the door for retirement. There are other circumstances with far-reaching impact that could trigger the need to sell or transfer your interests, so careful planning is essential,” Muth says. “The sooner you begin to think through and create your exit strategy and desired legacy, the smoother and less overwhelming the transition process is likely to be.”

  2. IDENTIFY POTENTIAL SUCCESSORS

    One of the most important parts of a business succession plan is naming the person you want to take the reins once you’re no longer there, and then grooming them for success. “If you have multiple successors in mind, be sure to provide detailed information about who will take over what, and in what capacity,” Muth says. “Also, consider sharing your plans with family. A well-designed business succession plan can help reassure them of your commitment to a fair and equitable transition of the business.”

  3. VALUE YOUR BUSINESS

    When you start the process of business succession planning, you should at the very least have a rough idea of what your business is worth. Your valuation will help you determine how much your successor will pay to purchase the business. Knowing what the business is worth will also help your successor know how much he or she will eventually have to save to purchase the business. Often a successor will also have a life insurance policy on the owner’s life in case the owner passes away unexpectedly. The life insurance will provide the funds the successor would need to buy the business.

  4. CREATE A BUY-SELL AGREEMENT

    A business succession plan makes clear who will take over the business. A buy-sell agreement, meanwhile, sets out the terms of that arrangement, including how any transfer of ownership will be funded. “Many business owners fund their buy-sell agreement with term or permanent life insurance,” Muth says. “Term insurance, which does not accumulate cash value, provides a cost-effective way to secure a temporary death benefit for a specific window of time. This can be attractive, especially if you have a date in mind for leaving your business that’s in the not-so-distant future.”

    In contrast, permanent insurance offers protection for life and the ability to accumulate cash value that can be accessed to help fund a buy-sell agreement, should you leave the business for a reason other than death. According to Muth, it also provides greater flexibility than term insurance. “You may be able to transfer the ownership of the policy to you when you leave your business and name your own beneficiary for the death benefit. This also would allow you to use any accumulated cash value in the policy for whatever you want, including to supplement your retirement income.”

  5. ENLIST THE HELP OF A PROFESSIONAL

    Because a business succession plan and buy-sell agreements are legal documents, you’ll want to consult with your financial, legal and tax advisors to ensure your plan is thoughtfully crafted, properly executed and fully funded. If you intend to pass along your business to family members, be sure your advisors are familiar with both personal and business planning issues.

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