3 Tests Every Succession Plan Must Pass to Succeed

Without a succession plan in place, odds are not good that your business will pass successfully from your leadership to the leadership of the next generation, whether it’s a small family business or a large corporation.

It’s also difficult to know when the succession will need to take place. Many people retire from their businesses at the time they’d been planning all along, but other things can happen. For instance, you may decide you want to change your career path or take advantage of a new opportunity before retirement. Poor health may interfere with your ability to continue to work full-time in a leadership position.

Just as individuals acquire life insurance to protect their families, businesses create succession plans to ensure the safe and smooth transition when leadership changes. Properly created and executed, a succession plan must pass the following tests in order to succeed. 

• Does it provide for a smooth transition?
• Does the plan secure your future income?
• Are taxes minimised in the process? 

In this post, we’ll take a closer look at these three tests to see if your succession planning is on track.

1. Does It Provide for a Smooth Transition?

During the succession, your business probably needs to continue operating as normal, and you’ll want the business to be well-positioned for continued success after you leave it.

For family businesses in succession planning, you may have some dynamic interactions between the generations. One of the keys to minimising differences between the generations is to get everyone involved early on in the planning process. When the future successors know how everything is run and how to hire and train new staff, the transition will be much smoother.

Tidying the business up can make a big difference in the smoothness of the transition. If you’re dealing with any ongoing or pending litigation, bring it to a conclusion. Have you been meaning to do something about existing tax liabilities? Now is the time to resolve those issues as well. Not only does this clean-up make the transition smoother, but it can also add to the value of your business. If you’re planning on selling, this can be highly advantageous.

2. Does the Plan Secure Your Future Income?

After you exit your business, you’ll still need income to live on, and your succession plan should provide you with adequate funds for the future.

Do you want to receive a lump sum as you leave the business? Or would it be better for your long-term financial planning to receive an annual income with benefits such as life insurance, medical insurance, professional memberships and other business-related expenses? Working these details out far in advance will help to ensure that your future needs are met.

3. Are Taxes Minimised In the Process?

Tax is always a major concern with estate planning and business succession. Poor succession planning can lead to a loss of wealth through one of the following: income tax, GST, stamp duty and other imposts.

Therefore, you’ll need to review your existing structure and match it with a strategy that will minimise your taxation. Will your plan result in the payment of Capital Gains Tax? How will the plan affect your personal income taxes?  Answering these questions will help you to know if your succession plan can effectively minimise your taxes.

Get Expert Advice for Your Succession Plan

Effective succession planning is a complex process. It involves financial, legal, tax and equity issues. Additionally, it can be an emotionally draining process. Bringing in an outside expert can help to minimise the emotional impact and help you to make sure that your plan passes these three important tests.

For a comprehensive look at the fundamentals of succession planning, download our popular Succession Planning 101 eGuide below: