Business Succession Planning: How to Plan for Success

For many businesses, succession planning is the elephant in the room. No one wants to think about it, but everyone knows they should.

Why is that? Why do so many otherwise-excellent business leaders drop the ball when it comes to succession planning? Why do so many of these consummate planners procrastinate when it comes to preparing for succession, until it’s too late?

One reason is that thinking about succession can be uncomfortable, even painful. Succession, the transfer of power from one owner/ownership model to another, is necessary to the continuity of any business. At the same time, it may involve addressing touchy issues such as death and disability, topics that are unpleasant for any team to reckon with and particularly emotional for family businesses.

Another reason? Succession planning is easy to ignore (until it isn’t). The leaders and owners of a business are often some of the busiest members of the organization—particularly in small or mid-sized businesses. And they often must invest the most time and energy in succession planning.

Understandably, many leaders prefer to focus on problems that seem more pressing to the immediate success of their business and their day-to-day operations, rather than an issue that feels like the distant future (and isn’t pleasant to think about). That’s magical thinking, of course. But it’s easy to understand how a good business leader could put aside succession planning to focus on the things that seem to matter more now.

The third and final reason why many business leaders put off succession planning is because the process itself can be complicated, demanding a lot of time and resources. Also, if not handled with care, succession planning can lead to conflict within the organization. As we mentioned, the process involves addressing a number of touchy subjects, including the allocation of power, which can strain relationships.

Between the uncomfortable topics, other urgent business issues that may take precedence, and demands of the process itself, it’s easy to see why so many business owners put off succession planning.

But that doesn’t mean you should. Planning for succession is critical to the long-term viability to your organization. While many fear it may lead to discomfort or even conflict, making a plan now can actually prevent greater conflict later and help all stakeholders feel more confident in the future. And although succession planning can be complicated, it’s much less so when you have the right professional by your side.

At Dugan & Lopatka, one of the top business succession-planning firms and business accounting firms, we have worked with numerous mid-sized businesses to create and manage succession plans. We understand the anxieties many business leaders feel when it comes to the planning process. But we have also seen how the right plan can make a world of difference—now and in the future.

In this blog, we’ll walk through the basics of succession planning: what it is, why it matters, and how you can get started.

What is succession planning?

What would happen to your business if your leadership departed tomorrow, next year, or a decade from now?

Who would take control of the business: a partner, an heir, a key employee, or a company or other outside party? How would that process work? And what specific steps would be taken to ensure a smooth transition of power?

A good succession plan seeks to answer those questions—in detail—and any others that might arise in the event that a key leader or owner leaves the company due to retirement, death, disability or any other situation that incapacitates the leader.

A good plan provides a detailed roadmap, outlining not only what will happen following the departure, but how and when. It lays out the step-by-step instructions as to how and when power, control and resources are distributed.

Why does succession planning matter?

One of the biggest benefits of a good succession plan is that it can make the transfer of power smoother, with less conflict, less expense, and fewer headaches. You’ve worked hard to build your business, and a succession plan protects your company while giving it a roadmap for the future.

Events that trigger a succession can be celebratory, such as a well-earned retirement. But they can also be tragic, as in the event of a death. Making a good succession plan ahead of time saves you from having to work out the difficult logistics of transferring power during what may be an emotional time. It also alleviates stress in the meantime; you and your fellow leaders can focus on your day-to-day operations while feeling confident about the long-term future.

If you plan to sell your company to a third party, planning your succession well in advance can help you get the best market deal. Critically, it can help ensure that you are able to sell your business before departing. Some companies that fail to plan for succession are unable to make a sale when the time comes, forcing them to liquidate their assets and miss out on the profits of a good sale.

In addition to those listed here, there are other, less-obvious benefits to succession.

As CPAs who work closely with clients to develop succession plans, one of our favorite parts of the process is the unexpected insights it often yields. Creating a succession plan forces business owners to see their business at a higher level than they normally do. Often, as we’re creating organizational charts and thinking about the structure of their company, our clients have revelations that inspire fresh ideas to make their business more efficient and effective.

Sometimes, the process of succession planning is as valuable as the plan itself.

Plan early, plan often.

Business owners and leaders are always asking our CPAs when they should start planning for succession. “Right now would be ideal,” we usually tell them.

In general, businesses should start planning in earnest about 3-5 years before an expected retirement. However, we recommend creating a contingency plan (in case of unexpected departures) as early as possible. It isn’t pleasant to think about, but the fact is that something could happen today, tomorrow, or at any other time that incapacitates a company’s leader. You can’t anticipate these events, but you can plan for them.

With that said, a succession plan isn’t a living document. Circumstances change, and a company’s structure and assets may shift. Much like a personal will, a succession plan should be regularly reviewed and updated as needed.

If you partner with the right professional to create and manage your plan, they’ll sit down with you periodically and ensure everything is up to date.

Don’t DIY.

Speaking of partnering with a pro, we always recommend working with a financial professional to create, manage and help execute succession plans. Here are two of the top reasons why:

  • Objectivity: Succession planning can be an emotional process. There’s a lot at stake, and it involves sensitive topics, including death and the distribution of power. A skilled third-party professional will bring objectivity to the process and guide various stakeholders over this difficult terrain.
  • Complexity: Besides being emotional, planning a succession may require specialized knowledge and skills, especially when a buy-out is involved and/or the organization has a complex hierarchy. Always create your plan with financial and legal professionals to ensure the document is clear, correct and thorough.

At Dugan & Lopatka, we can help you create a smarter succession plan.

As one of the leading corporate accounting firms in Chicago, Dugan & Lopatka has partnered with numerous businesses to develop and manage succession plans. Our clients range from family companies and not-for-profits to manufacturers, distributors and other mid-sized organizations.

What makes our approach to succession planning unique? We take the time to truly understand your business—its history, culture, values and goals—and the people who run it. Through our planning process, we help you develop a plan tailored to your business that will bring confidence and clarity—now and in the future.

Looking for business accounting in Chicago, cloud-based accounting services, or corporate accounting in Chicago? Learn more about our complete range of services here.

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