6 min read
Most business owners intend to plan for succession eventually. In practice, the plan often doesn't get built until an outside event forces the issue — a health scare, an unsolicited acquisition offer, or a key employee threatening to leave. Starting the process earlier, on the owner's own timeline, generally produces more options and a better outcome than starting it in response to a crisis.
Succession planning is not the same as estate planning
Estate planning addresses what happens to an owner's assets, including business interests, after death. Succession planning addresses who runs and eventually owns the business, and it's just as relevant to a voluntary retirement or sale as it is to an owner's death. The two should be coordinated — a succession plan that isn't reflected in estate planning documents, or vice versa, can create real conflicts — but they're answering different questions and require different planning steps.
Identifying the transition path
Most succession paths fall into one of a few categories: a transfer to family members, a sale or transfer to key employees or management (sometimes structured as a management buyout), an outright sale to a third party, or, less commonly, a transfer to an employee stock ownership plan. Each path has a different timeline, a different effect on the owner's after-tax proceeds, and different implications for employees and customers. Owners sometimes assume the path before evaluating whether it's realistic — a family member may not want the business, or may not be ready to run it — which is why this identification step benefits from being explicit rather than assumed.
The role of a buy-sell agreement
For businesses with multiple owners, a buy-sell agreement is one of the more important documents most companies don't have, or have but haven't updated in years. It governs what happens to an owner's interest in the event of death, disability, retirement, or a dispute among owners, and it typically sets or establishes a method for the valuation used in that transaction. Buy-sell agreements are commonly funded with life insurance so that the business or remaining owners have the liquidity to complete a buyout without a forced sale of business assets.
Valuation as a starting point, not a final answer
An early, informal valuation — sometimes called a calculation of value rather than a full valuation — gives an owner a realistic sense of what the business is worth today and what's driving that number. That's useful information well before a transaction is imminent, because it identifies the levers available to increase value over the planning horizon: customer concentration, dependence on the owner personally, quality of financial records, and recurring versus one-time revenue all affect a valuation and are all, to some degree, addressable if there's enough time before a transaction.
Building the timeline
A general guideline is that meaningful succession planning benefits from a three-to-five-year runway, which is enough time to address value drivers, develop a successor or management team, and structure a transaction in a way that manages the tax consequences rather than accepting whatever they turn out to be. That timeline compresses considerably when planning starts in response to an unplanned event, which is exactly the scenario an earlier start is meant to avoid.
This article is provided for general informational purposes only and does not constitute tax, legal, accounting, or financial advice. Rules, limits, and thresholds referenced here change over time; confirm current figures and how they apply to your specific situation with a CrestPoint CPAs advisor.