Ensuring a Smooth Succession Plan For Your Business

Whether you’re on the verge of retirement or still squarely at the head of all company operations, it is wise to have a solid succession strategy in place

Ensuring a Smooth Succession Plan For Your Business

Max and Matthew Sadler 

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Matthew Sadler will be moving on from his drain cleaning business in a year’s time. But he has a succession plan. His son, Max, will be taking over the family company, Sadler Sewer & Drain Cleaning of Green Bay, Wisconsin, featured in the September 2021 issue.

“Max will take the company where he wants to take it, not just doing what worked for Dad,” Sadler says. “He can drive this sewer company wherever he wants it to go because it will be his. I am giving him the great gift of freedom.”

Max, 18, has been shadowing his father on the job most of his life and has gradually developed a larger role in the company as he’s grown older. For the last two years of high school, Max was home-schooled, allowing him even more flexibility to increase his involvement and do further training in all aspects of the business.

“I can go on vacation knowing my son is in charge of my business and that he will make proper choices,” Sadler says.

All signs indicate that Sadler Sewer & Drain Cleaning is in the midst of a successful succession process, but that is not the case for all companies. Some do a poor job of planning for such change and are left unprepared when that change comes. Here’s some advice to keep in mind.

Create a clear plan

Attorney Alison Petri, of Wisconsin-based Steimle Birschbach, encourages business owners to create a clear-cut strategy for succession. The plan should be in place years before the owner wants to exit the business because of unexpected circumstances that can arise, such as the owner dying or becoming incapacitated in some way.

“People don’t think ahead,” Petri says. “I don’t think it’s something you can ignore until you plan to retire, because sometimes there might be other plans for you.”

To start, she asks these types of questions:

  • Do you want the business to close if you die unexpectedly?
  • Do you want the business to be sold to a third party, family member or employee?
  • Who will have the authority to make immediate, day-to-day decisions and long-term plans?
  • How can the business stay open, at least short-term, for the sake of the employees and clients?

Estate and succession planning ensures the continuity of the business and protects business assets when an owner passes away, Petri says.

“The worst-case scenario is the business fails or folds. Then you’re doing auctions of equipment, closing out accounts and perhaps not getting as much for your business as it’s potentially worth.”

Determine how to exit

Owners may choose to transition their business to another party during their lifetime but should also develop a plan to take effect at the time of death. Where there’s a will, there’s a say.

“Whether you’re leaving the business to family or leaving it to a third-party owner or potential purchaser, the transfer can be done in the most cost-effective and smoothest way to avoid business disruption,” Petri says, referring to the value of advanced planning.

So, where do you begin?

“A will can be useful, but it doesn’t necessarily deal with the continuity and efficiency that you would need to keep your small business running,” Petri says.

With a will, a personal representative or executor needs to be appointed before other action occurs.

“That’s where you can lose continuity and potentially have issues related to business management,” Petri says. Therefore, writing a will might not be the biggest concern for a business owner.

“It might be a different type of estate planning document, like a trust, or in the business, an operating agreement and organizational structure,” she says.

Craft a trust document or declaration

For a sole proprietorship, Petri recommends a trust document. With a trust, business owners can decide what happens to the business on their passing. Perhaps they want to transfer the business to their brother, not their spouse. Maybe they’d like to give an employee or family member the first option to purchase.

“If you’re a sole proprietor, you could have it laid out in a trust or simple declaration of who it’s going to pass to,” Petri says. For an LLC, partnership or corporation, the successor could be lined up in an operating agreement.

Put the right people in charge

Choosing a successor ensures that the person taking over is familiar with the business; the spouse or children of the owner might not know where to start.

“A personal representative may or may not know anything about the business itself and now has an interest and stake in making decisions about the business,” Petri says.

Plus, the representative would probably need to wait until the court gives permission to work on behalf of the estate.

“To ensure you don’t have to wait for the courts and have a person managing the business who is aware of all the ins and outs, have a successor lined up,” Petri says.

Equally important are the legal documents and management system authorizing individuals to do everything the business owner typically does. They can pay employees and invoices, serve clients, and keep the business humming.

“You want someone to get in there and do what needs to be done,” Petri says.

Furthermore, without a succession plan, the surviving spouse or children can lose the business equity the owner built over time. The business may be an owner’s biggest asset and only stream of income. When the owner dies, the surviving spouse or family might not have anything left.

“You worked hard with nothing to show for it, and then the income dries up on top of it.”

Work with a team of advisers

The ideal time to develop an estate/succession plan is at least five to 10 years before retirement. Petri recommends working with a team that includes an accountant, financial adviser and attorney. This team can handle the legal and financial aspects of succession to avoid a lengthy probate process and reduce taxes.

“Every state is a little bit different about what its rules are, but generally they’ll have some version of a trust or nonprobate transfer,” Petri says.

Structure a buyout

A buyout can be structured in lots of ways, and the advisers can explain the advantages and disadvantages of different strategies. The owner, the business itself, or a family member may want to purchase life insurance to help cover the purchase price. The purchaser can pay a lump sum in a buyout or provide the owner with a stream of income during retirement.

Although it may be tempting to find resources online and create your own plan, Petri warns against it because of the many pitfalls. For business owners, this is not the time to cut corners.

“Overall, you want to be working with an attorney to make sure you’re doing the best for your set of circumstances,” Petri says.

Plan ahead

Creating the right plan is highly individualized, based on the business and the owner’s wishes. However, every estate/succession plan should:

  • Be tax-effective
  • Ensure continuity of operations
  • Put the right people in charge to make critical decisions
  • Avoid a lengthy probate process
  • Alleviate stress for family and employees
  • Safeguard the assets and investment built over time


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