John Mercer never imagined his sudden heart attack at age 58 would leave his business vulnerable. With no formal succession plan in place, his family struggled to maintain operations while managing their grief. Key clients, concerned about service continuity, began exploring relationships with competitors. Meanwhile, valuable employees, uncertain about the company’s future, entertained offers from other firms. Within 12 months, the business John had dedicated his life to building had lost 40% of its value.
This scenario (although fictional in this case) plays out with alarming frequency among business owners who haven’t adequately prepared for the inevitable transition of their businesses. Unlike non-business owners who can simply name beneficiaries for their retirement accounts and life insurance, business owners must consider complex questions: Who will run daily operations? How will ownership transfer? What happens to client relationships and obligations? How will the business value be preserved during transition?
Succession Planning Options
How business owners structure their succession plan depends largely on their business model. Those operating within established partnerships or multi-owner businesses have different considerations from those of solo entrepreneurs.
For business owners in partnerships or multi-owner enterprises: Owners who are part of an established business with multiple principals should review all governing documents, including operating agreements, bylaws and buy-sell provisions, ensuring they align with their personal estate plan.
Owners should pay particular attention to how their business interest will be valued upon their death or incapacity. Ambiguous valuation methods often lead to disputes between remaining partners and the deceased partner’s estate, sometimes resulting in litigation that damages both the business and family relationships. Owners should work with their partners to establish clear, fair mechanisms for business valuation and ownership transition.
For solo entrepreneurs and small business owners: Solo business owners bear complete responsibility for all business matters and client relationships. Their personal guarantees often secure business leases, loans and other obligations, creating potential complications for their estates.
Several options exist for solo entrepreneurs planning for succession. One approach involves entering a formal agreement with another professional in their field to assume responsibility for the business in the event of their death or incapacity. This arrangement works particularly well for professional service providers who can identify colleagues with similar expertise and client service philosophy, such as doctors, dentists, attorneys, etc.
Another option is to include detailed provisions in their will or trust for handling their enterprises and directing executors to engage qualified management to oversee the transition. Another alternative is to arrange for someone to assume temporary leadership while a permanent succession solution is implemented.
Regardless of the mechanism chosen, a succession plan should be formalized in writing and regularly updated as the business evolves. The designated successor should understand the given industry and be capable of evaluating time-sensitive matters.
The Critical Role of Documentation
Whether the business is a manufacturing plant, a retail store or a consulting practice, comprehensive documentation forms the backbone of effective business succession planning. Owners should create a business continuity dossier containing:
- Access information for physical facilities, digital systems and financial accounts;
- Contact details for key employees, vendors, clients and professional advisors;
- Business insurance policies, including liability coverage and key person insurance;
- Loan agreements, leases and other contractual obligations;
- Intellectual property documentation and licensing agreements;
- Employee benefit plans and payroll processing information; and
- Tax records and financial reporting systems.
This information should be stored securely but remain accessible to the designated successors and personal representatives. Owners should update the dossier regularly as their business circumstances change.
Family Considerations in Business Transitions
Family dynamics add another layer of complexity to business succession planning. If some family members actively participate in the business while others do not, owners must determine how they will reconcile this in their plan. If multiple children work in the business, how will leadership transition? Will ownership and management remain unified or separate after the owner’s departure?
These sensitive questions require thoughtful consideration well before a crisis occurs. Frank family discussions, professionally facilitated if necessary, can prevent misunderstandings and establish realistic expectations. Owners should document the outcomes of these discussions in both their business succession plan and their estate plan.
Conclusion: The Business Legacy
A business represents more than just financial value — it embodies its owner’s vision, values and years of dedication. Proper succession planning ensures this legacy continues according to the owner’s wishes, providing peace of mind that the owner’s life’s work will be preserved and those who depend on the business will be cared for. Just as business owners have shown foresight and determination in building their business, it’s important they demonstrate the same qualities in planning for its future beyond their stewardship.
Sarah Clifford is a shareholder at Gallagher & Kennedy, advising individuals, families, and business owners with their estate plans to help manage and preserve wealth and assets. Her experience includes probate and trust administration, including representation of high-net-worth clients with trusts and estates valued in excess of $20 million.
