1.

Timeline of Succession
There are two key types of succession plans. Depending on one’s current life
situation, you may be writing one or both:

1. Exit Succession Plan — A plan to transfer ownership on a specific date,

e.g., at retirement.
2. Death or Accident Succession Plan — A plan for one’s business in the
event of their death or disability.

While an accident plan should be considered at any age, an exit succession plan
is only necessary if you’re within several years of retirement. In this scenario, you
should start to think about when, specifically, you’d like to transfer the business,
and how long the overall process will take. For example, some business owners
like to stay involved in the business to some capacity, while others prefer a swift
exit.

On the document, answer all the questions in section one. If you’re writing this
succession plan to exit your business on a known date, fill out any additional
detail about how long you expect the transition to last.

Pro Tip: Start Planning Years Ahead

Mark Teitelbaum, AXA Advanced Markets

Where an owner is looking to sell to an outside group,

it might make sense to begin planning five to six years before a sale or
retirement. That will give them time to get their financials in order, make
adjustments to product and income lines and, essentially, groom the business to
be attractive to an outside buyer.
If they plan to transfer the business to family members or key employees, they
should begin as soon as possible. This will involve training and coaching key
employees in other aspects of the business, to clients, bankers, etc. For family
members, it will involve grooming individuals and working to balance interests
between those who will run the business and those who will not.

2. Determining Your Successor

Arguably the most important part of your succession plan is figuring out who will
take over. Depending on your situation, this might be a:

 Co-owner
 Family member
 Key employee
 Outside buyer

Choosing can be tricky. Even when there’s an obvious choice, it’s important to
consider what’s truly in everyone’s best interest. For example, keeping the
business in the family can seem like the best way to secure your loved one’s
livelihood. However, this needs to be balanced with the fact that second
generation businesses do have a higher failure rate (70%). Some business
owners instead opt to sell their interest and provide a cash inheritance to their
family.

In the template, we recommend filling out profiles for at least three potential
candidates. This will give you a good preliminary comparison of everybody’s
skills and experiences. Even if you’re already set on a candidate, it’s good idea to
have a backup plan in case that person leaves your business or simply doesn’t
want to become an owner.

We also have a complementary guide that covers the pros and cons of each type
of succession. This can help you decide, for example, if an outside buyer is more
preferable than a key employee, or vice versa.

3. Formalize Your Standard Operating

Procedures (SOPs)
Every successful business knows the importance of writing down and formalizing
their day-to-day functions. However, standard operating procedures (SOPs) also
need to be documented for future owners, managers and employees to
reference. Whether it’s a daily checklist for opening the business, training
procedure for new employees, or a full performance management system, all of
these can wreak havoc on a business when the information is lost.

SOPs vary from business to business, but often include the following items:

Org Chart A flowchart of your employee structure, including roles, departments an

reports to whom. Check out the best org chart software.

Operations Manual A rundown of all daily functions — e.g., checklist for how to open & clo
store, a flowchart of how projects get completed.

IT Manual An overview of any computer, tech or software systems used by your b

Employee A manual that covers company policies, procedures, culture, benefits,

Handbook more. Check out our employee handbook template.

Training Programs A set of procedures for training and onboarding new employees in vari
Learn more about talent management systems.

Skill Retention Plans for ongoing training — e.g., quarterly meetings to review new str
Strategies changes to employee handbook.

Performance An explanation of how employee performance is measured and review

Management Consider performance management software.

Meeting Agendas An overview of any other regularly-held meetings, such as sales meetin

In our succession plan template, we’ve provided a checklist for these items —
feel free to add or remove any, if necessary. Once you have a completed an up-
to-date document, staple it to your succession plan and check it off the list.

4. Value Your Business

Figuring out the value of your business should happen early — and regularly. It’s
an unfortunate fact that many business owners tend to overvalue their enterprise,
and these misjudgements can snowball into financial errors when planning for
retirement.

To help you value your business, we’ve developed a simple calculator that

provides a rough estimate and a more detailed guide with advanced business
valuation methods as well as tips for hiring an appraiser.

At this stage, you’ll also need to consider the lowest offer you’ll actually accept. If
the business will be placed on the marketplace upon your retirement or triggering
event, it could take a long time before someone is willing to pay full price. Your
succession plan can provide stipulations regarding how long to wait before
dropping the price.

Pro Tip: Specify a Valuation Method in the Contract

Doug Lawson, AXA Advanced Markets

Where your business interest will be sold pursuant to a

contractual buy-sell agreement, it’s important that the value of the business or a
price-setting formula be established and incorporated into the agreement at the
time it is drawn. This establishes certainty and decreases the chance that the
parties will have to resort to litigation to sort it out. Common methods for setting a
purchase and sale price include 1) Book Value, 2) Agreed-upon Value, 3)
Appraised Value, and 4) Formula Value.

5. Fund Your Succession Plan

Last but not least, this section answers the question: how are you actually going
to get paid for your business?

Few buyers out there have enough liquid cash to pay for your business upfront.
This is why every succession plan needs a specific plan for how the buyer will
make the purchase, whether it’s a loan, installment payments, or other option.
The last thing you want is to reach your retirement date, or triggering event, and
find that your chosen successor has no way to afford your business.

This is also why your funding plan will often need a buy-sell agreement. This is a
legal document in which your buyer agrees to a specific course of action (like
taking out a loan or life insurance policy) in order to afford the purchase. Once
you’ve settled on a specific method of funding, make sure you meet with a legal
professional to draft your buy-sell contract.

Here are the most common ways succession plans are funded:

Life Insurance
Most commonly used when a family member or co-owner is taking over the
business, a life insurance policy can help your successor purchase the business
from you or your heirs. Contrary to how it sounds, life insurance isn’t only used in
the event of one’s untimely death. Permanent life insurance builds cash
value that can be taken out at any time, so it can also be used in the event of
retirement, disability, or any other triggering event.

Life insurance arrangements are common in family successions, especially when

you may have multiple children, but only one is taking over the business. With
your chosen successor as the beneficiary, a life insurance payout can enable
them to purchase shares from your other children, thus leaving everyone with
some compensation and financial security.

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Acquisition Loan
An acquisition loan is money borrowed by the buyer in order to purchase the
business. This is common when a key employee or outside party is taking over
and they need some funding to afford the purchase. Buyers can typically get 70 –
80% of the purchase price financed from a bank or the SBA — which is great
news for sellers who want a full, upfront payment for themselves or their loved
ones.

Acquisition loans are secured against future profits of the business. While this
makes them a generally reliable option, it also means a bit of work for the seller.
Prior to the purchase, you’ll need to provide a lot of details about your business
for the bank’s due diligence. Even then, however, the loan is not guaranteed.
Pre-approval can provide some security, but it would need to be undergone
regularly (every 6-12 months) up until the transfer date or triggering event.

Seller Financing
Seller financing is when the buyer pays you back gradually over time. This is one
of the easiest and most flexible arrangements, as the business owner and buyer
can set whatever terms they like. Most agreements involve a down payment of
10% or higher, followed by monthly or quarterly payments with interest until the
purchase is paid for in full. Again, however, the exact terms can vary widely.

The key downside to seller financing is the time it takes to get paid back.
Especially if you’re relying on the sale to fund your retirement, a 20-year term
may be less than ideal. However, given the flexibility of seller financing, it can be
possible to find an arrangement that works for everyone.

The Bottom Line

Oftentimes, the hardest part of succession planning is asking the difficult
questions: What unexpected events do I need to prepare for? Who is able to
take over my business? How will I compensate myself, spouse, or children?

Once you’ve answered these with the help of our succession planning template,
the rest of the effort is fairly straightforward. With the help of legal and financial
experts, you’ll draft the appropriate legal documents to formalize your plan.
These experts should help you find the best possible financial and tax-saving
arrangements, whether it’s life insurance, an acquisition loan or seller financing.