A succession plan is a written document that provides for the continued operation of a business in the event that the owner—or a key member of the management team—leaves the company, is terminated, retires, or dies. It details the changes that will take place as leadership is transferred from one generation to the next. In the case of small businesses, succession plans are often known as continuity plans, since without them the businesses may cease to exist. Succession plans can provide a number of important benefits for companies that develop them. For example, a succession plan may help a business retain key employees, reduce its tax burden, and maintain the value of its stock and assets during a management or ownership transition. Succession plans may also prove valuable in allowing a business owner to retire in comfort and continue to provide for family members who may be involved with the company.

Despite the many benefits of having a succession plan in place, many companies neglect to develop one. This oversight may occur because the business owner does not want to confront his or her own mortality, is reluctant to choose a successor, or does not have many interests beyond the business. Although less than one-third of family businesses survive the transition from the first generation to the second—and only 13 percent remain in the family for more than 60 years—just 45 to 50 percent of business owners establish a formal succession plan. "Succession and the planning it entails is equivalent to planning one's own wake and funeral," observed one family business consultant in Industrial Distribution . "But the fact is that the transfer of power from the first to the second generation seldom happens while the founder is alive and on the scene." Yet it is one that must be prepared for, if the business owner hopes to avoid having hard-earned assets go to unwanted individuals and institutions. "The economic costs are significant," agreed James Bieneman in Business First-Columbus . "[But] the human costs are even greater in terms of spoiled family relationships, missed career opportunities, and the discomfort of living in a state of misalignment."


Experts claim that the succession planning process should ideally begin when the business owner is between the ages of 45 and 50 if he or she plans to retire at 65. Since succession can be an emotionally charged issue, sometimes the assistance of outsider advisors and mediators is required. Developing a succession plan can take more than two years, and implementing it can take up to ten years. The plan must be carefully structured to fit the company's specific situation and goals. When completed, the plan should be reviewed by the company's lawyer, accountant, and bank.

"One of the main reasons business owners should take the time to create a successful continuity plan is that they should want to get out of the business alive, with as much money as possible," Joanna R. Turpin noted in Air Conditioning, Heating, and Refrigeration News. To do this, the business owner has a few basic options: sell the company to employees, family members, or an outsider; retain ownership of the company but hire new management; or liquidate the business. An Employee Stock Ownership Plan, or ESOP, can be a useful tool for the owner of a corporation who is nearing retirement age. The owner can sell his or her stake in the company to the ESOP in order to gain tax advantages and provide for the continuation of the business. If, after the stock purchase, the ESOP holds over 30 percent of the company's shares, then the owner can defer capital-gains taxes by investing the proceeds in a Qualified Replacement Property (QRP). QRPs can include stocks, bonds, and certain retirement accounts. The income stream generated by the QRP can help provide the business owner with income during retirement.

In Family Business Succession: The Final Test of Greatness, Craig E. Aronoff and John L. Ward outline a number of steps companies should follow in preparing for succession. These steps include: 1) Establishing a formal policy regarding family participation in the business; 2) Providing solid work experience for all employees, to ensure that succession is based on performance rather than heredity; 3) Creating a family mission statement based on the members' beliefs and goals for the business; 4) Designing a leadership development plan with specific job requirements for the successor; 5) Developing a strategic plan for the business; 6) Making plans for the preceding generation's financial security; 7) Identifying a successor or determining the selection process; 8) Setting up a succession transition team to keep decision-makers informed about their role in the changes; and 9) Completing the transfer of ownership and control.

In the Small Business Administration publication Transferring Management in the Family-Owned Business, Nancy Bowman-Upton also emphasizes that succession should be viewed as a process rather than as an event. She describes four main stages in the succession process: initiation, selection, education, and transition. In the initiation phase, possible successors learn about the family business. It is important for the business owners to speak openly about the business, in a positive but realistic manner, in order to transmit information about the company's values, culture, and future direction to the next generation.

The selection phase involves actually designating a successor among the candidates for the job. Because rivalry often develops between possible successors—who, in the case of a family business, are likely to be siblings—this can be the most difficult stage of the process. For this reason, many business owners either avoid the issue or make the selection on the basis of age, gender, or other factors besides merit. Instead, Bowman-Upton recommends that the business owners develop specific objectives and goals for the next generation of management, including a detailed job description for the successor. Then a candidate can be chosen who best meets the qualifications. This strategy helps remove the emotional aspect from the selection process and also may help the business owners feel more comfortable with their selection. The decision about when to announce the successor and the schedule for succession depends upon the business, but an early announcement can help reassure employees and customers and enable other key employees to make alternative career plans as needed.

Once a potential successor has been selected, the company then enters the training phase. Ideally, a program is developed through which the successor can meet goals and gradually increase his or her level of responsibility. The owner may want to take a number of planned absences so that the successor has a chance to actually run the business for limited periods of time. The training phase also provides the business owner with an opportunity to evaluate the successor's decision-making processes, leadership abilities, interpersonal skills, and performance under pressure. It is also important for the successor to be introduced to the business owner's outside network during this time, including customers, bankers, and business associates.

The final stage in the process occurs when the business owner retires and the successor formally makes the transition to his or her new leadership role. Bowman-Upton stresses that the business owner can make the transition smoother for the company by publicly committing to the succession plan, leaving in a timely manner, and eliminating his or her involvement in the company's daily activities completely. In order to make the transition as painless as possible for himself or herself, the business owner should also be sure to have a sound financial plan for retirement and to engage in relationships and activities outside of the business.

Business owners that fail to adhere to the above steps may end up cobbling together succession plans that do not reflect the best interests of the company or of its stakeholders (valued staffers, family members, partners, etc.). "Why and how often do succession plans fail?" wrote Bieneman. "Succession plans fail when serious conflict (some call it dysfunctional behavior) cannot be overcome, when family members have and cannot abandon unrealistic expectations, or when the family business has run its course and should be sold but isn't. Succession plans are an exercise in compromise, tough love, forthrightness, and making difficult but necessary decisions."


Aronoff, Craig E., and John L. Ward. Family Business Succession: The Final Test of Greatness. Business Owner Resources, 1992.

Bieneman, James N. "Succession Plans Provide Blueprint for Peace of Mind." Business First-Columbus. October 6, 2000.

Bowman-Upton, Nancy. Transferring Management in the Family-Owned Business. U.S. Small Business Administration, 1991.

Frieswick, Kris. "Successful Succession." Industrial Distribution. April 1996.

Shanney-Saborsky, Regina. "Why It Pays to Use an ESOP in a Business Succession Plan." The Practical Accountant. September 1996.

Turpin, Joanna R. "Succession Planning Requires Long-Term Strategy, Implementation." Air Conditioning, Heating, and Refrigeration News. April 28, 1997.

SEE ALSO: Estate Tax ; Family-Owned Business

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