Succession Planning: The Most Important Plan You Haven't Made - Linden Legal Strategies | Legal Advice. Simplified.

Picture a round table discussion of 10 owners of successful privately held businesses. Then ask the owners without a succession plan for their business to leave the room. Can you guess how many of the 10 owners are still sitting at the table?  Amazingly enough only 2. That’s right, 80% of privately held businesses have no succession plan in place.  This means that after reading this blog, 80% of you should immediately pick up the phone and arrange a meeting with your lawyer, accountant and financial advisor to start talking about developing a succession plan for that business you’ve worked so hard to build. The other 20% of you are not off the hook. Even if you have a succession plan, after reading this blog you should immediately pick up the phone and arrange a meeting with your lawyer, accountant and financial advisor to evaluate and update your succession plan.

HA, you think to yourself. I have a succession plan – I have a will.

Succession planning is NOT the same thing as estate planning. A will is an estate planning instrument. It is a roadmap to the delivery of assets at the end of one’s life.  Succession planning is the procedure by which a business maintains its life beyond that of its maker. A will and other estate planning tools are a rigid set of instructions. The succession plan is a fluid set of procedures that are formulated to provide guidance at many different points in the future. The succession plan may be called on to guide either at the time of retirement, at the time of passing or at the time an owner wants to reduce her daily workload but continue to grow the value of the business. If you only remember a couple of points from this blog, please make sure one of them is that the best succession plan is the one NOT set in stone.

Succession planning is a journey not a destination (the boring, technical section)

If I haven’t said it enough, succession planning is a process. As a process it can be broken down into smaller steps. Miss a step and guess what happens? You fall down, and like Humpty Dumpty, you break something – namely the future value of your life’s work. So, now that the boring list is a little less boring, let’s unveil it.

First: determine what you want and need to happen with your succession plan.

The key ingredient to formulating an effective succession plan is determining what YOU want and need in the future. Your plan should not be the result of a free download from Google nor should it be the culmination of “copy and paste” from 5 other “great” succession plans. The best succession plan is the one that unfolds as you search your heart and head and are confident enough to guide yourself to satisfaction.

Second, organize your business affairs so you can figure out what you actually have to plan with.

Sometimes a business is successful in spite of its owner but most likely it is because of you, the owner. You know all the people and processes and vendors and issues. Your hand- on approach is what made your business. It is also what makes it essential to organize your business affairs so as to structure a viable succession plan. If not everything you use and need in the business appears on the financial statement, then you need documentation about these other items, people or processes. By organizing the affairs of your business, you can focus on how the business will function when you are no longer the conductor. This will also aid in the determination of value of your business. The more clarity there is, the more value there is.

Third, choose professionals who can effectively guide you through the process.

Let’s start with the not so obvious. Consider only professionals who have a reputation for being ethical and excellent. With that as a starting point, pick a professional who make it “feel right”. Make sure you like them, not as a friend necessarily but as a counselor. The professionals who help you develop your succession plan are privy to you most private thoughts and are helping you develop the most important plan of your life. The succession plan will take care of your family, your employees and perhaps even yourself long after you are able to do so.  The advisor who your friend Janie raves about may be a good starting point but the best adviser for YOU is the one that suits YOU and your business.

Fourth, choose your successor.

Sometimes the identity of your successor is quite apparent. It could be the son, daughter or niece who is working in the business. Alternatively, it could be that valued key employee who’s always been your right-hand man. The most difficult aspect of choosing a successor is usually dealing with who you aren’t choosing. This is not the time to be diplomatic or to please everyone. The choice of your successor determines the successfulness of your business succession plan. A significant aspect of choosing a successor is the economics of your business. In choosing a family member as your successor, you have to evaluate whether you will sell or gift the interest. This is a complicated balance between your succession plan and your estate plan that should be analyzed by your professional team. On the other hand, if your successor is a key employee, you’ll need your professional team to develop a viable source of funds for the employee buyout. Many owners of closely held businesses are now finding that their highly-mobile offspring and workforce are not in interested in being saddled with the business that you’ve worked so hard to build. In this the case your professional team will be your guide once again to identify a competitor or an outside investor to buy your business.

Fifth, determine the value of your business.

Depending on who you ask, your business valuation will fluctuate somewhere between impossibly low and ridiculously high. Interviewing your business valuation expert is essential. The first question you should ask is what method the professional will use to value your business. If the answer is a single method, you should thank him for his time and run the other way! A business should be valued by using at least 2 of the following 4 traditional valuation methods. These methods are adjusted book value, capitalization of earnings, excess earnings capacity, or cash flow/leverage debt. The best methods depend on the type and size of your business.   Once a value has been determined using the standard methods, that value should be compared to the value of other comparable businesses. Remember value is in the eyes of the beholder

Sixth, figure out how you’re going to fund the plan.

Funding a succession plan is the topic of books, seminars and much discussion among professionals and businessmen. Some of the more frequently used techniques include life insurance (key man and cross funded), gifting, third party financing, buy-sell agreements, trusts and various employee purchase plan.  Just like the plan itself, the best funding technique is the one developed for a particular business. No one dollar fits all!

Now, after reading this, please send its link to 9 of your friends. Hopefully, that way the 10 of you will remain at the round table with your succession plans in hand!


This article is for informational purposes only and does not constitute legal advice nor does it create an attorney-client relationship.  Always consult appropriate legal counsel for specific questions related to your business. Some states may consider this attorney advertising.


Linden Legal Strategies PLLC is a Richmond, Virginia-based law firm focusing on small business law and development. To learn more about how Linden Legal Strategies can help you start, grow and protect your business, or to schedule an initial consultation, contact us.