Succession Planning for Small Business: The Basics

As a small business owner, you put time, money and care into your business. The vast majority of businesses in Canada are small businesses, or are owned and operated by families. For many, it’s not just a source of income, but an important part of their family’s life and legacy. But what happens when you’re no longer at the helm? According to PWC, 25% of Canadian CEOs aren’t sure if their business will be viable in 10 years if they continue on their current path.

Creating a succession plan is a crucial step for any business owner who wishes for their business to carry on after they retire or pass away. It’s more than a mere administrative task- it’s a strategic approach to planning your business’s future. Whether you’re considering retirement, giving leadership of the company to a family member, or planning for unforeseen circumstances, a detailed succession plan ensures continuity and secures your business’s legacy. In this article, we’ll discuss the basics of succession planning, and what you need to know to get started.

Benefits of Succession Planning

Each business’s succession plan should be tailored to their operational needs, being mindful of potential risks and opportunities within their organization and the market they operate in. Some of the benefits of creating a detailed succession plan include:

Continuity and Stability

A well-structured succession plan ensures that your business continues to thrive when you’re no longer leading it. In general, a succession plan helps to minimize disruptions, maintain operational stability, and provide an easier transition for employees, customers, and stakeholders.

Talent Retention

Succession planning identifies potential leaders within your organization, and provides structured plans for their professional development in the company. By preparing existing employees for key roles, you retain valuable talent and avoid the costly process of external recruitment.

Risk Mitigation

Life is unpredictable, and unexpected events can impact your business. A succession plan prepares you for such contingencies, reducing the risk of business interruption due to illness, death, or other unforeseen circumstances.

Preserving Company Culture

Your business’s culture often contributes to its commercial success. This is usually a very important part of the operations of a family business. A thoughtful succession plan ensures that cultural values, work ethics, and organizational standards are passed down to the next generation of leaders in your business.

Financial Security

A smooth transition prevents financial instability arising from an interruption in operations and employees struggling with new responsibilities. Whether you’re selling the business or passing it on to a family member, a well-drafted succession plan safeguards the business’s financial interests.

Tax Efficiency

Depending on the company’s share structure, carefully planned succession can reduce tax liabilities for both the outgoing owner and the successor. Particularly for family businesses and companies with multiple shareholders, it’s essential to consult with financial and legal professionals.

Different Models of Succession Planning

There are a number of different paths business owners can take when creating their succession plan. As a business owner, you can customize your succession plan to align with your business’s unique needs, family dynamics, and personal goals. Some of the most common models of succession planning for family-owned and small businesses include:

Internal Succession

In this model, the successor comes from within the organization. It involves identifying existing employees for leadership roles, and working to develop their skills and knowledge over time to prepare them for taking over the business. Benefits of this approach include continuity, the successor’s familiarity with company culture, and a smooth transition for other employees and stakeholders.

Family Succession

For many family businesses, it’s very important to keep leadership of the company within the immediate family. This can be emotionally rewarding, and an essential part of supporting the culture and financial interests of the business and family. However, family succession requires careful planning to ensure a smooth transition, balancing family dynamics and the needs of the business.

External Succession

External succession involves bringing in an outsider—a qualified individual who may purchase the business or simply take over as the new leader. This model can provide fresh perspectives and skills, but requires thorough vetting of potential candidates. Further, it requires a detailed succession plan to ensure the original owner’s expectations and visions for the business’s operations are met in the future.

Hybrid Succession

Some businesses combine elements of internal and external succession. For example, an internal candidate or candidate from within the family may lead initially, with a long-term plan to bring in external talent for specific roles.

Emergency Succession

This model prepares for unexpected events (like sudden illness or death). It designates interim leaders and outlines procedures to ensure business continuity during crises. This planning method puts emphasis on contingency planning, and should include detailed guidelines for day-to-day business operations, long-term goals and company culture to ensure the most simple transition possible.

The Succession Planning Process with a Lawyer

Your business’s succession plan should be uniquely tailored to its operations, market, and employee and family culture. Every succession plan will look different, and every succession planning process will differ in some ways as well. In general, the process of creating a succession plan looks something like this:

Step 1: Assessment and Setting Goals

• Consultation: Meet with a lawyer to discuss your business, personal goals, and family dynamics.
• Identify Objectives: Clarify what you want to achieve through succession planning (for example, smooth transition, tax efficiency, preserving legacy).
• Assess Assets and Liabilities: Evaluate your business’s financial health, assets including intellectual property, and debts.

Step 2: Legal Documentation

• Buy-Sell Agreements: Set up agreements that address ownership and share transfer in specific situations (for example, retirement, disability, death).
• Power of Attorney: Designate someone to make financial and legal decisions on your behalf if you become unable to.

An important element of a detailed succession plan  is ensuring that your personal estate plan is up to date. If you become unable to manage your business and personal financial affairs suddenly as a result of serious injury or illness, it is essential to have a power of attorney and personal representative ready to assist. Otherwise, your family will have to seek a court order to authorize someone to manage your affairs. This not only causes stress and delay for your family, but can impact the normal operations of your business.

Step 3: Identify Successors

• Identify Roles: Consider the role or roles that you will be stepping out of in the future, and what responsibilities will need to be taken over by a successor or successors.
• Internal Candidates: Discuss potential successors within your organization.
• Family Members: Consider family members interested in taking over.
• External Search: Explore external candidates if suitable for your business’s operations and your vision for the future.

Step 4: Training and Transition

• Professional Development of Your Successor(s): Create a detailed plan to support your successors in developing the knowledge and experience they will need to take a leadership role within the company.
• Training Period: Allow time for the successor to learn the skills necessary to fill the role competently.
• Gradual Transition: Avoid abrupt changes; gradually transfer responsibilities.
• Communication Plan: Inform employees, clients, and stakeholders about the transition when it is time for you to step down.

It’s important to remember that the training and transition process will look very different for every business, depending on their operations, licensing requirements and successors. Creating a detailed plan for training and transition is essential.

Step 5: Regular Review and Updates to Your Plan

• Life Changes: As circumstances change both personally, within your family, or the market your business operates in, update your plan.
• Legal Changes: Stay informed about tax obligations, corporate governance regulations, and estate planning laws. 

An estate lawyer brings legal expertise and objectivity to the succession planning process. They ensure your succession plan aligns with your wishes and protects your business’s legacy in an efficient and risk-averse way. It’s important to understand that your succession plan and supporting documents, such as power of attorney appointments and your personal will should be revisited frequently to ensure they align with your wishes.

Reminders for Business Owners

For many family-run and small business owners, their company represents more than just an income. Your company is an important part of your family’s lifestyle, history and legacy. Developing a detailed succession plan for your business is essential to ensuring its continuity if you become unable to run the business. Business owners should remember to:

• Start Early: Begin your succession journey well before retirement. The earlier you start, the more finely tailored your plan can be.
• Seek Professional Guidance: A lawyer’s expertise ensures legal compliance, tax efficiency, and a smooth handover.
• Tailor Your Succession Plan: While we’ve discussed different common models of succession planning—internal, family, external—don’t hesitate to combine them. Hybrid models or personalized adaptations to the succession plan can fit your business’s unique circumstances.
• Be Mindful of Your Legacy: Yes, financials matter, but so do your business’s values, culture, and social impact.
• Make Regular Updates: Life and business changes with time— marriage, death, and market shifts can all impact your family business. Regularly review and update your plan to keep it relevant and effective.

Succession planning, particularly for family businesses, is not just about financial and operational stability. A detailed succession plan can support you in achieving your long-term goals for your family and business, even when you are no longer able to work. If you’re ready to start succession planning for your small business, contact an experienced lawyer today.

Have a question about this topic or a different legal topic? Contact us for a consultation. Reach us via phone at 250-888-0002, or via email at info@leaguelaw.com.