What we're talking about 

When the founder or CEO of a business decides to step away – or has to, for a reason outside their control (eg, ill health) – a succession plan is needed. In this, a successor is primed to take over the reins – whether that's a family member, another employee or an external third party – along with an outline of what will happen to the business. That includes how and to whom you'll transfer leadership, as well as a valuation and formal guidance on how to handle elements such as staffing, strategy, operations and finance. 

Why it's important 

Thanks, in part, to the uncertainty of Covid-19 (and a smaller part to an excellent TV show named Succession), succession planning has taken on increased relevance in recent times. That's a good thing. Doing this proactively has numerous benefits, particularly for family businesses. Failing to have a clear plan can cause myriad issues, yet a 2021 study suggests only a third of US family businesses have a robust, documented and communicated plan in place. 

Ultimately, succession planning is how you protect the value you've created and ensure that your business will continue to exist and, hopefully, thrive. It means stability and clarity as opposed to indecision, confusion and potentially costly legal and organizational roadblocks. It can mean saving cash on taxes when ownership is transferred or increasing the value of your business if you're looking to sell. It minimizes disruption for your customers and, lastly, it provides peace of mind for a founder that their business is going to be in safe hands. In the here and now, writing a succession plan will also help you clarify your strategy, spot immediate weaknesses and train people in specific areas where they're perhaps lacking. 

Things to note 

You have options. There are five standard ways to transfer business ownership. One option is appointing a family heir. The other four options involve selling your shares: to a co-founder (this may already be dictated in your partnership agreement), a chosen employee, an outside party or – in some cases – back to the company. The buyer may purchase outright, over a number of years or with the help of life insurance. There is, of course, also the option of closing the business. Each has different consequences in terms of the legacy of the business, how difficult it is to execute and how much money you'll make. Here's a useful overview of the options.

It pays to start early. Succession planning is complicated. There are lots of moving parts, and it'll take a while to make sure they're each running smoothly. Training a successor or looking for a buyer, for example, won't happen overnight. It's standard practice to spend around a year writing the plan and then a few additional years implementing it. So, it makes sense to start several years before retirement, at the very least – fleshing out the bare bones of the plan, if not the precise details. 

You'll need professional advice. Working with third parties is pretty much a necessity when it comes to succession planning. There are businesses that deal with every element required, but legal, accountancy and HR are all important areas for planning for the future. 

Be smart about how you communicate. As well as considering the points of view of a wide variety of stakeholders when devising your plan, you should speak to those you expect to take on top roles in the future to ensure that they're on board. They'll need to do their own work to prepare. Likewise, don't underestimate the value of communicating your plans with your wider team. Business morale will be negatively impacted if employees feel left out or that the future of the business is being ignored. Some countries (like the UK, with its TUPE regulations) will also dictate that you have to tell employees certain things. Transparency does, however, have to be tempered with sensitivity and discretion. Some information needs to remain confidential, and some should be revealed only once finalized.

How to write a succession plan 

1. Identify your value. Start by getting a sense of how much your business is worth. A lot of decisions you make will be built on this foundation. Similar businesses in your space can offer a comparison point, and there's information on methods of valuation here. As you'll need to enlist legal and financial assistance anyway, you might start here. 

2. Decide what you want to do. Based on the options available to you, this is a big call: what do you want to happen to the business when you're no longer running it? If that's appointing a successor (family member or not), consider their skills, commitment, internal popularity and also how much they embody the values that you set your business up with. If you don't want to appoint a successor, think about how alternative options could protect the value of your business. 

3. Coordinate with your successor. Depending on which option fits your situation and how far out you are from stepping aside, you may need to come to a concrete understanding with the person taking over from you. This might involve a fair amount of back and forth. Much of what you decide now will be financial: confirming that your successor will be able to purchase your shares and sketching out the buy-sell process ahead. 

4. Start writing the plan. With this buy-in – and if you're opting to do this yourself – you can start formalizing your succession plan. See the template linked below for an example of how to lay out your document. The next steps relate to the sections you should include. It's worth including a contingency option or two alongside each big decision, in case your first choice falls through.

5. Lay down the financial terms. Detail how much the business is worth, who your portion of its ownership is being transferred to, at what cost and on what terms. Work with your advisors to ensure the process you choose is as tax-efficient as possible and to get supporting agreements in place. 

6. Clarify your business goals and strategy. This is where you explain the ‘why’ behind your succession plan. Revisit and list your company's and your personal goals, values and overarching game plan. Explain how this plan allows for the continuation of this long-term vision.

7. List your Standard Operating Procedures. Alongside writing a strategic overview, you should also set down a guide to keeping your business running on a day-to-day basis. Some stuff to include here could be your organizational chart, any relevant step-by-step operations manuals, employee and manager's handbooks and company policies. This template might help. 

8. Make a staffing plan. Note those you'll leave as ‘key employees’, outlining what their duties will be and how this will affect the overall set-up of your business. Detail the training and onboarding in place for your successor and anyone else whose role will change. Writing this section will require a lot of real-life legwork, conversing with employees and identifying where the talent is in your business.  

9. Draft events into a timeline. You've now covered all the bases, so map an order of events to help with the implementation of your plan. Assign time frames for aspects like the sale of the business, stages in training and the transfer of specific responsibilities. This will ensure that your transition out of the business is gradual. 

10. Review regularly. Things will change in the period before your succession plan is actioned – particularly if you've mocked it up as a precaution, long before you plan to retire. Rework your plan every now and then to account for this. 

Key takeaways 

• Planning adequately for the future will make your life and the lives of your family, employees and customers much easier – it'll ensure the best financial situation for involved parties. 

• If you want things to keep going after you're gone, you can appoint a family member to take the reins, or sell up to a co-founder, employee, third party or back to the company itself. 

• A written succession plan needs to account for what you're doing, as well as why and how you're doing it. It should also include the critical info your successor needs to operate without you. 

Learn more 

Perspective. Personal finance correspondent Sharon Epperson from news site CNBC explains why succession planning is crucial for small businesses. 

Example. Steve Melhuish, co-founder of real estate business PropertyGuru, speaks to management consulting firm McKinsey about his experience planning a successful leadership succession at a startup. 

Tool. Here's a succession plan template from digital resource site Fit Small Business, plus some tips for populating it. You might also want to check out some succession planning software.

A version of this article was published in the Courier Workshop newsletter. For more deep dives into essential business concepts, sign up here.