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A Succession Plan Can Protect You, Your Family, and Your Employees. Here's How.

The 'what ifs' don't have to keep you up at night if you think through different scenarios as part of a succession plan.

This story originally appeared on Principal Financial Group

Small business owners and stress? They've gone hand in hand forever. And those worries only ramped up during the pandemic: 70% of business owners and managing partners are more stressed and have less planning time now than a year ago.1 Fewer hours to think ahead might include neglecting succession planning: According to the Exit Planning Institute,2 78% of businesses have no transition team, and 83% have no written transition plan.

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A business succession plan, however, contains more than just specifics on how to sell a company. It also can hold continuity details that help employees understand what to do should the business owner become disabled and unable to work, or if an owner's family must sell. That, in turn, can help protect co-owners, employees, and beneficiaries.

"You might have a goal in mind about what you're going to do with the business, but what are you going to do about the things that you can't plan for?" says Mark West, national vice president of business solutions for Principal®.

Here's what to consider.

Use your succession plan for the 'what ifs.'

The basics of any succession plan include:

  1. Timing: when to step out
  2. Price: how much the business is worth
  3. Successor: who will become the next owner or owners
  4. Partners: which consultants help during succession
  5. Exit strategy: what the transition looks like
  6. Personnel: which employees retain key knowledge

Say you have a succession plan in place, and have identified an owner, price, and date of transition. What happens if the owner-to-be gets divorced?

That one scenario points to the level of 'what ifs' to consider in any succession plan. "Transitions have a huge impact on not just the business, but your plans for retirement and for future income for your family," West says.

That's why a well-rounded succession plan also addresses business continuity. Without it, plans for income and retirement can too easily get disrupted. Some continuity discussions include:

  • Divorce of future or current owner
  • Death of future or current owner
  • Departure of a key employee(s)
  • Disruption by future owner, such as backing out of the plan
  • Income provision for a current owner should illness or accident disrupt the succession plan timing
  • Income provision for the family should the owner die before the sale is complete
  • Personal bankruptcy for either the owner or owner-to-be
  • Felony conviction of any party to the agreement

Continuity questions to ask during succession planning

Part of the reason to create a succession plan is to provide a retirement date for you, the small business owner, and a source of income for you and your family after you leave. You also want to ensure the business continues to grow, particularly when it comes to customer relationships.

Including contingencies in your succession plan can help, but it involves thinking through lots of scenarios. "It's asking yourself what's going to happen if those things occur, and do you have a game plan," West says. Those include:

  • Income: What accommodations will provide income should you have to take a leave before a succession transition is complete? How will your succession date change if future owners need disability time off or suffer a financial setback?
  • Customer relationships and leadership: Should disruptions occur, who will assume key roles to ensure quality of service or product (and future business prospects) are not impacted?
  • Life events: Succession plans can include automatic triggers that provide next steps should certain disruptions happen. "For example, say a future owner dies and ownership would pass to his or her spouse," West says. "The trigger could provide a review period to see if a different succession setup will take place."

Good succession and continuity planning is really about the "what ifs," and the more you think through, the better. "You don't want to have to come back in and fix what's now broken because you didn't think through a succession plan disruption, and you don't want to worry about retirement or income either," West says. "You can figure out how to fund for and plan for uncertainties and hopefully they'll never happen."

Do you need more help to get started on your succession plan? Find explanations and transition insights at the Principal business succession hub.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Insurance products issued by Principal National Life Insurance Co (except in NY) and Principal Life Insurance Company®. Plan administrative services offered by Principal Life. Referenced companies are members of the Principal Financial Group®, Des Moines, IA 50392.

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Principal Financial Group

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