What Are The 4 Stages of Succession Planning?
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Choosing a successor is not an easy task, however, if you follow the steps in succession planning outlined below, the 4 stages of the succession planning task will be more organized.

Four Stages of Succession Planning
Four Stages of Succession Planning

First Stage Out of Four Stages of Succession Planning

This is the first of four steps in the process of developing a succession plan.

1. Choose Your Successor

The successor must be someone who has the right skills and ability to lead your company once you decide to leave. If you cannot do this on your own then seek the advice of your board of directors if you have one.

Otherwise enlist the aid of an attorney, accountant, and business succession plan consultant to aid in the choice. Making the decision should not be based on emotional factors but rather on objectivity.

The plan should not be completed within months of your decision to retire, but rather between ten and fifteen years prior.

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2. Life Insurance

Life Insurance for owners that have business partners, could be perilous to the ongoing operations and allow for the succession plans to be needed and used.

The death of one business partner could result in considerable losses for a business and could force a business into insolvency. One of the most important things for the owners to determine before a succession plan is initiated is their life insurance policy.

Life Insurance can be held by a third party or by the business on the owner’s life, so long as the third party has an “insurable interest” in the insured’s life.

An important document to have executed between all owners is a buy-sell agreement funded by life insurance. In this case when any partner passes away the life insurance proceeds are paid to the business for running the operations.

Another beneficiary can be chosen but there must be assurance that the funds will be used to help run the business. There should also be a stock sale agreement either as part of the buy-sell or as a stand-alone agreement.

This will outline how the stock of the deceased partner will be distributed to the other partners or purchased by the business.

3. Business Interruption Insurance

A second type of insurance that should be purchased is Business Interruption Insurance, which protects the business in the event of an interruption to the usual business operations.

Business interruption coverage is added to a property insurance policy or included in a package policy.

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Second Stage of Succession Planning

When drafting the second step of the plan, the financial needs of the owner and his/her spouse and family must be considered.

Many experts contend that a retired individual can live on roughly 80 percent of their working salary; however, that number is often unrealistic.

This is due to the fact that the financial needs of many times will surpass 100 percent of their previous income due to the possibility of travel, gifts to family, and extra money spent on grandchildren; all can take the predecessor over and beyond their former income.

Succession Planning Third Stage

The third step in the strategy is determining who will manage the business and developing a management team.

In this stage, it is critical to understand that management and ownership are not the same and ownership will be addressed in the fourth step.

Oftentimes management can be given to key employees while the succession of the ownership still remains with the family.

The business owner should realize that there should be substantial delegating of authority so that management will successfully transition to the next generation or a key employee.

It has been determined that generally in succession matters a period of three to five years is needed to select, mentor, and train the new management successor. This aspect should be one of the first actions of the plan.

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Develop a Formal Training Plan for Your Successor

To create a winning training program for your successor, categorize the vital functions of the company. Your potential successor should spend some time working in each area of the business in order to learn how the company operates.

Your successor should become actively involved in the business of your company so he or she sees the extent of every aspect of the operation.

By creating a culture that persuades the person to take charge within the broad guiding principles you have established, you create space for your successor’s manner to fit with your all-encompassing business goals.

Establish a Timetable

The timetable for training must be well established and your successor and management team must know who will be in charge of each department. The successor cannot succeed if you overrule decisions routinely.

A timetable will also motivate your successor to complete training as soon as possible and as successfully as possible. In a business with multiple departments, the successor should spend between six and ninth months learning the intricacies of each department and how they operate.

During this time the successor might have ideas on how to improve each department, but should not be allowed to make changes. Changes should be discussed with the current owner and all managers to ensure that the change makes sense and will not be costly.

Prepare Yourself for Retirement

It’s also important to delineate a plan for your conversion from officer and operations manager for the company. Your retirement plan should be started early. The plan might include travel, community service, and a business you want to start along with your retirement funding.

The importance of a good retirement plan is having the proper funding to live adequately. If you have not started a retirement savings account, do not wait any longer.

The longer you wait the harder it will be to have the proper funds available to live the remainder of your life in comfort.

As your successor assumes more responsibility, allow yourself time to determine what you will do once the successor takes over.

Install Your Successor

Your successor should be allowed to begin running the business while you are still active. After the successor has been allowed to assume all responsibilities of running the business, you can continue on as a consultant or move to retirement.

You have to lay the groundwork and provide the training to establish the culture of your company. Your senior management and board of directors will be the support mechanism and system of checks and balances for the new owner.

Fourth Stage

Transfer Ownership

Transferring ownership should not be taken lightly. There are many ways in which this can be done. Your attorney and accountant should be consulted to determine the best method for you and your business. Remember, you want to minimize taxes on the transfer.

About Author

David G Komatz is the Author of this post “four stages of succession planning”. He has experience in accounting, leadership, management, and Human Resources. He also has written an extensive book on Succession Planning available on Amazon which provides further details on the topic.

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