Do You Have a Documented Succession Plan for Your Business?

Do You Have a Documented Succession Plan for Your Business?

August 08, 2023

A written contingency or succession plan is a necessary step in business ownership. Yet PwC’s 2021 U.S. Family Business Survey found only 34% of family-owned companies had a documented and communicated succession plan. Your business could be in jeopardy without one.

Make emergency and long-term exit plans. An emergency plan typically accounts for events like an unexpected death or termination of employment. A long-term plan is a strategy you conduct over the years. It might involve bringing on new leadership, such as transitioning a child into the business so you can begin the retirement process. Or it might involve selling off parcels of the business or working toward a strategic vision.

Succession plans require an accurate assessment of things like:

Business areaExample
Annual income

Business income is any payment in property or services before deductions. You can tabulate your annual income using accounting software from documents such as:

  • Sales logs
  • Bank deposits
  • Paid client invoices

Your annual business income affects the company's value in the event of a divorce, death or acquisition. It also dictates how much insurance you need.


Business assets, such as the following, have measurable monetary value:

  • Real property
  • Vehicles
  • Cash
  • Sold inventory
  • Insurance policies with cash value
  • Intellectual property and patents

Business liability is typically something that your business owes money on now and in the future, like:

  • Outstanding mortgages and loans
  • Taxes
  • Unpaid lines of credit
  • Unpaid rent
  • Contractual obligations
  • Unsold inventory
  • Employee payroll and benefits
Employee stock ownership plan (ESOP) holdingsAn ESOP gives workers ownership interest in the company in the form of shares of stock. ESOP values can vest over time or immediately. Stocks are divested according to a legal decree (like a divorce or death) and can become a significant obstacle to your company’s succession plan. 
Legal and tax structure of the business

Your company’s structure affects how it’s treated from a tax perspective. According to the IRS, there are five core business structures:

  • Sole proprietorships
  • Partnerships
  • Corporations
  • S corporations
  • Limited liability companies (LLCs)

The structure of your business plays a big role in your succession planning. For example, a sole proprietorship will terminate and get taxed as part of your estate after you die. An LLC will continue after your death and all company-owned assets will remain in its possession.

A company’s structure can also affect its cost basis (the original value) at the time of succession. Certain tax structures adjust the business value to reflect its current market value. This “stepped-up” basis can be a tax advantage for those who inherit it. For example, a stepped-up cost basis can reduce the taxable capital gains if your family or partner sells later.

Business partner and employee roles

A business’s key employees and partners have specific skill sets or roles that are difficult to replace, such as:

  • Top salespeople
  • People who act as the face of the company
  • Executives
  • Creatives
Talent retention strategiesYour business might use special benefits to attract and retain high-value employees for the long term. For example, deferred compensation plans are life insurance-based retirement plans for select employees. The tax-deferred life insurance policy accumulates cash value, providing later income for the employee or a tax-free death benefit for their beneficiaries.

Planning for emergencies and expected transitions

Make a clear path for your business successors until they integrate into the company. If your long-term plan involves selling your business, a clear path to mitigating liabilities can make the sale of your business more attractive.

Maintain accurate records of your business income, assets and liabilities. Annual income estimates are typically easier to track using software and accounting data. Assets like property might need occasional appraisals to keep abreast with market values. 

Update your succession plan as your business grows. Business expansion may require increased protection, especially when your liabilities change. This might include an inventory surplus or revenue dip as you gain a foothold in new territories.

Organize select employee benefits like deferred compensation plans. Plans like these could keep high-value employees from leaving during a business leadership transition or sale, ensuring critical talent continues to feed your business.

Track business liabilities and carve out a debt repayment strategy. For example, business loan insurance can provide a cushion against outstanding business loans after you die. Outstanding business loans might include property or mortgages, vehicles or fleets, or unsold inventory. 

Review your emergency succession plan annually to ensure adequate funding of your coffers. For example, you may need to buy out a partner’s shareholder interests due to a divorce or replace lost client revenue after a key employee quits.

Robust succession planning can help offset the loss of crucial revenue, employees and clients, increasing your business’s chance of survival for future generations.

Start your succession plan

Kick off your business succession plan by consulting your power trio: your lawyer, accountant and insurance agent. They can help you organize documents and advise you about the next steps to safeguard your legacy.