The 5 Pillars of Integrated Business Succession Planning

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Entrepreneurs are valued for their ability to start businesses, but another one of their responsibilities is to arrange for their business’s succession. This needs to be started long before you need to leave your business.

Why is business succession so important? Without meaningful plans for passing the business along to the next generation of leaders, it may cease to exist. A successful business succession involves consideration for all of the key stakeholders, and it offers a viable pathway toward future growth and prosperity.

In this blog post, we’ll examine the five pillars of integrated business succession planning, each of which is necessary to secure the future of your business.

Business succession strategy

1. Succession Strategy

Choosing the right business succession strategy is key to the future of your business. The strategy can depend largely on the current business structure, future plans and business vision.

For instance, if the owner wants to finance his or her retirement through the business succession, a withdrawal or profit distribution policy might be an effective strategy. Under other circumstances, a family buy-out (FBO) or contribution to a family trust might be the best strategy.

External arrangements may also come into play when discussing the best succession strategy for your business. A management buy-in (MBI) or management buy-out (MBO) could be the best strategy, or the business could be sold to strategic buyers or investors. IPOs have also been used as succession strategies. There isn’t one single clear-cut approach that works well for all businesses; you’ll need to carefully think about your goals, financial situation, and stakeholders’ wishes.


Business-succession-finances

2. Financial Analysis

The second pillar of integrated business succession planning is financial analysis. Before you can properly plan your succession, you’ll need to prepare financial documentation on which to base your decisions.

One of the most important pieces of information is a business valuation. Without an up-to-date and accurate business valuation, you won’t know how much to ask for it (if you sell) or what kind of profit distribution you can expect.


Succession Planning eGuide

Your financial analysis can also look at the separation of private and company assets, especially if yours is a family business, and it also seeks the optimal capital structure. If necessary, your financial analysis could also include information about reorganisation and restructuring. In short, you need a financial analysis to establish a business valuation reference point.


Business succession tax

3. Legal and Tax

Legal and tax analyses are another important pillar of business succession planning. Without a working knowledge of your company’s current contractual relationships and risks, it’s impossible to develop an effective succession plan.

As you gather this information, seek out shareholders agreements and even inheritance and nuptial agreements of the company partners. This information can help you to know which succession strategy is the best fit for your business.

Next, evaluate various transaction structures such as the sale of assets or shares, placement in foundation and transfer without monetary consideration. With all of this information you’ll be able to determine the best transaction structure for your succession.

You’ll also need to know the current tax situation of both the company and the owner family. Taxes are a huge consideration when it comes to succession transaction structuring.

 

Finding a business successor

4. Finding a Successor

Who will take the owner’s place after he or she is gone? In order to answer this monumental question, you may need to contemplate several different avenues of thought. Some owners consider a sale to a strategic buyer or financial investor. Some use a family buy-out, a management buy-out or a management buy-in. Some don’t know anyone who is a good fit within their organisations and have to seek outside buyers.

Part of finding a successor for your business is defining a tactical plan and establishing a reasonable timeline. This task requires serious due diligence because the person you choose can largely determine the trajectory of the business you’ve been building.

 

Transfer of business ownership

5. Transfer of Ownership

If you have worked dutifully through the first four pillars of integrated business succession planning, this final pillar will be straightforward and satisfying. Transferring ownership of your business requires due diligence on the part of the successor and final contractual negotiations with the most promising interested parties.

Once all negotiations are finalised, it’s time to fix the price and sign and close on all the contractual agreements.

How long does it take to complete these five pillars of integrated business succession planning? That depends on a number of factors: the careful examination of the company on the part of the buyer, negotiations, the gathering of financial, legal and tax information and more. For best results, succession planning is started at least five years in advance. It’s not always possible to foresee issues that will arise during the planning process, especially when some of those issues come from outside of the organisation.

When you start early, you can have a significant influence on the future direction of your business by guiding it through a successful transition to new ownership. For more information about business succession planning, or for help with any other business issue, contact us at Altus Financial.

Business succession planning guide

Marc Walsh

As a Principal Client Adviser at Altus, I work with business owners of SME’s that have a business vision or a goal they want to achieve. Our clients often work with me to get the best approaches to structuring, cash flow, minimise the risks in their business whilst considering increasing their personal wealth. Let's Connect