The Building Blocks Your Business Needs For A Strong Succession Plan


Whether you’ve just set up shop or are celebrating a major company milestone, your business needs a seamless and efficient succession plan. 

All businesses undergo transition, and being more prepared to handle that transition will only pave the way for future success. 

Change is inevitable, and as a business owner, you know that. How can you build a succession plan that will benefit you and your business?

What’s The Business Worth?

A formal valuation is critical. Valuation is the process of determining the current or projected worth of an asset, in this case, the company. This process will look different for companies with multiple partners and public companies with stock. 

There are five critical elements in determining what the business is worth and creating a strong succession plan. Both need to work synergistically to yield the greatest return for the business itself as well as the partners. Those elements are as follows.

1. Set a Target Departure Date.

It’s nearly impossible to create a road map for a successful exit without at least a general idea of when that date will be. How can you establish this timeframe? Ask yourself targeted questions like,

  • Do you want to have ownership in the business until you retire?
  • What role would you like to have in the company? Do you see yourself as the CEO forever or would you transition into the head of the board or another function out of the day-to-day operations?
  • Do you have other business ventures that you’d like to explore?
  • What is your next step professionally?
  • How do you envision company growth long-term?

Without creating a definition for what your “departure” means to you, the exit plan will lack traction. 

2. Undergo a Preliminary Financial Needs Analysis

Any comprehensive exit strategy requires a preliminary financial needs analysis. The results will help you set and assess your financial wants and needs. It’s not a replacement or substitute for your financial plan, but it illustrates the amount of money you need to recoup from the business transfer to achieve financial security and independence. 

This analysis gives you greater insight into funding for the next phase of your life. How will you know the amount of money you need? Our team can help you walk through a thoughtful review of your desired lifestyle, financial needs, non-business income, among other factors.

If the sale of your business is a significant part of your retirement nest egg, you’ll likely need a high sale/transfer price. Knowing your desired outcome also helps you spend your time more wisely when speaking with potential investors. 

3. Identify a Target Successor

Most business owners enjoy having a sense of control over their lives—it’s likely one reason why they went into business for themselves—so it only makes sense that they would like to have influence when deciding a successor. 

Your exit plan should reflect the type of person you envision taking over your business. Ask yourself,

  • Do you wish to hand your business over to a family member?
  • Do you have a business partner and would they like to take over as sole owner?
  • Will a stellar current employee be in the running?
  • Would you like to consider someone external?

Knowing the type of person you’re looking for will help you stay on the path to plan and prepare for your objectives. 

4. Obtain a Preliminary Valuation

Now, to the fun part—determining what your business is likely worth. A formal business valuation prepared by an appropriate professional (not your best friend’s educated guess) gives you and your exit planning team a reliable idea of how your business will contribute to your financial goals.

  • Will the transfer of your business be enough to supplement your other retirement savings?
  • Should you work a little longer to build a bigger cushion?
  • Will you obtain a larger offer from an outside source as opposed to keeping it in-house, and how will that impact your decision?

Once you have a sense of what your business is worth, you can work towards exit planning solutions.

5. Create a Future Cash Flow Estimate

Cash flow drives your current income projections; it will also fuel your continued ownership, and your eventual departure. Working with your financial team to prepare a cash flow projection, helps you and your advisors evaluate the likelihood of success given various exit strategies. 

  • Is it best to sell immediately? 
  • Are you likely to get more bang for your buck in 5 years? 
  • Should you sell to a larger corporation or retain the family-owned spirit?

Professional cash flow projections can also prevent your plan from taking a wrong turn. You’ll be able to evaluate your decisions and support them with numerical evidence. Your business cash flow drives the structure of your daily operations. It helps you inform when you can hire, when to invest in growth and education, and when to reign everything in. The same is true for your exit strategy. 

Properly planning your cash flow will set the foundation for a successful succession strategy. 

Consider a Buy/Sell Agreement

Otherwise known as a business will or prenup, a buy/sell agreement creates a clear structure for a buyout in the event of incapacitation, death, and/or exit from the company. Often, this settles uncomfortable decisions or costly deadlocks upfront. It also ensures that everyone is clear on the buyout terms from the start, streamlining a succession. 

This type of agreement is only appropriate when multiple owners are involved. A buy/sell agreement outlines the buying terms outright such as when the owners can sell and how much each will be expected to pay. 

It’s also essential that the agreement specifies the purpose for the business proceeds—retirement, investments, new business venture, etc.—so that it creates a clear use of the capital. Why would this be necessary? Perhaps the last thing you would want is for your co-owner to cash out and blow it all in Vegas. 

Clearly Understand the Tax Implications

Selling your business can lead to a huge windfall, which while exciting, can also result in a large tax consequence. You want to establish tax-friendly practices and structures that allow you to keep the most money working for you, not lining the government’s pockets. A few elements to consider here:

  • Establish the right corporate structure—LLC, corporation, etc. This can help ensure your business functions in the most efficient way possible. Some businesses may also benefit from electing to be taxed as an S-corp. The right business entity brings tax efficiency and legal protection to your doors. 
  • Set up a Family Limited Partnership. Helping to establish a tax-friendly business transfer, an FLP is an entity owned by at least two family members. They can buy shares in the company and profit based on their ownership rights. The tax parameters surrounding FLPs are complex, so be sure to work with your trusted financial team and tax specialist before implementing. 
  • Open a business trust. A business trust allows a trustee to manage a beneficiary’s financial role in the business. 
  • Consider an installment sale. Think of this as a buy now pay later arrangement. The total revenue is recognized at the point of the cash collection, not the sale itself. Buyers make regular payments, which can help space out income for tax purposes.  

Without proper preparation and tax planning, your tax bill could be larger than necessary. At Blue Rock, our team is passionate about implementing a strategic tax planning approach to lower your tax burden and maximize profits. 

Our team has helped several business owners find financial and personal fulfillment with sophisticated exit strategies designed to meet their goals. Ready to establish an ironclad exit strategy? Get in touch with our team today.