How to successfully document your succession plan

Whatever you're doing in business, documenting your plans is essential, and succession planning is no exception.

Succession planning can take anywhere from six months to a few years, depending on the complexity of your plan and the specific circumstances of your business.

Documenting a succession plan typically happens towards the end of the process and only constitutes about 20-30%  of the work. Nevertheless, it's a crucial step in ensuring your business continuity plan and wishes are carried out, your assets are protected, and you meet your legal requirements.

Related: What is succession planning and why is it important?

The planning before the written plan

Before we jump into the documentation process, let’s go over the other 70-80%—what you need to consider and what needs attention before you create your official succession planning documents. Here are some key questions to ask yourself during the succession planning process.

What do you want to achieve?

Think about your goals and objectives for the succession of your business. Who do you want to take over? How do you want the transition to occur? And what legacy do you want to leave behind? 

Also, look at various ‘what if’ scenarios. For example, what would happen if you were to become incapacitated or pass away suddenly? How would this affect others, such as your family, fellow business owners, staff and clients?

What’s my financial position?

Look at your financial assets and liabilities statements to assess your position. Make sure you understand what you own. For example, are your assets individually or jointly owned? Also, look at who you owe. List all of your debts and financial obligations and determine the total amount and terms of repayment. 

What’s my business structure?

This means identifying the legal entities through which you own assets. In other words, who owns what? If your assets are owned in a superfund or family trust, consider how they’ll be treated and transferred in your succession plan. 

Who will be non-financially impacted?

As well as considering the financial side of succession, it’s important you also think about the non-financial side. Who will be impacted? And how can you minimise any threat or loss? Here are some examples:

• Family – How will you ensure their livelihoods and future is okay?
• Business – Do you want it to continue? How can you transfer ownership with minimal disruption for fellow business owners and family?
• Team/staff – Will they have continued employment? Is this an opportunity for growth?
• Clients – How can you minimise disruption and continuity of the business relationship?

Related: Planned succession: why you need an exit strategy 

How can I protect against financial loss?

For this aspect, consider and review your personal risk insurances: 

• Life insurance – Provides a lump sum payment to mitigate any business risks and provide cash for your family to retire debt and support their future needs/living.
• Buy-sell agreement insurance – Provides cash flow to fellow business owners to buy your shares to facilitate the transfer of ownership in the event of your death, disability or retirement.
• Insurance for unforeseen circumstances, including: 

           - Total and permanent disability insurance (TPD) – Provides a lump sum payment if you become totally and permanently disabled, ensuring financial stability for you and your family and helping to fund your exit from the business if necessary.

           - Trauma insurance – Provides a lump sum payment upon diagnosis of a serious medical condition, offering financial support during illness and potentially assisting with business succession plans.

           - Income protection – Provides a regular income if you’re unable to work due to illness or injury, ensuring financial stability and potentially helping to maintain your business and succession plans.

Related: Unplanned or emergency succession: how to protect yourself

Do this before you document the plan

Once you’ve done all of the above, but before you physically document your succession plan, we strongly recommend you do the following:

• Confirm your financial position – Know exactly how much you’ve got and that everything is yours to bequeath.
• Communicate with related parties, including:

           - Fellow business owners – This will ensure everyone is on the same page regarding the future direction of the company and can lead to a smoother and more coordinated transition.

           - Your family – This will help ensure the expectations of your loved ones are aligned and can avoid and prevent potential conflict.

           - Your accountant – To discuss structure and tax. 

           - A lawyer – To look at legal documents and your requirements.

           - Business advisor – They can help you gain clarity around your thought processes and discuss your business’ commerciality and profitability. 

Succession planning document checklist

For a comprehensive succession plan that ensures a smooth transition, you’ll need a suite of documents, some business-related and some personal.

Business documents 

• Shareholders Agreement – Details the rights and obligations of shareholders, including transfer of ownership and exit strategies.
• Succession Deed (Deed of Succession, Deed of Family Arrangement) – Deals with how ownership in business interests should be dealt with in the event of transfer of ownership, retirement, death, or other circumstances. 
• Memorandum of Understanding (MOU) – Outlines the operational considerations and agreements between parties in the event of a change in ownership or leadership.

Personal documents 

• Will – Outlines how your assets and possessions should be distributed after your death. Who gets what? Who has control of companies and/or trusts? Do you need to set up testamentary trusts for dependents?
• Memorandum of Wishes (Letter of Wishes) – Guides executors and trustees to ensure the personal wishes laid out in your will are carried out. It should give some context as to why you drafted your will the way you did and be in line with your will. Though it’s an optional document, it’s sensible to have one, especially if you think your will could be contested. 
• Power of Attorney – Gives a person or trustee organisation the legal authority to act for you to manage your assets and make financial and legal decisions on your behalf.
• Appointment of Enduring Guardian – Legally appoints another person to make decisions about your health and lifestyle in the event you can’t make these decisions for yourself. 

Related: Estate planning: Q&As for business owners

My succession plan is documented: what now?

Once your plan is formally documented following the above succession planning template, you may wish to discuss it with others. We always recommend collaborating with an accountant, business advisor and lawyer throughout the process. 

Importantly, your succession plan isn’t a set-in-stone document. You should review your succession plan regularly and make any desired changes on an annual basis or as and when any major change in circumstance occurs. 

Need help with succession planning and/or documenting your plan? Reach out to your Maxim Advisor or contact our team today.