6 steps to succession planning for businesses

Transitions and change are hard—especially for small business owners. It can be tough to wrap your head around leaving something you created and led, and even harder if multiple people might be interested in taking over.

That might be part of the reason why many businesses face succession risks. Nearly a third of business owners don’t have a succession plan in case of an owner’s death. And even more (43%) don’t have one in case of an owner’s disability.

“Often the hardest part is the emotional aspect,” says Patti Bell, assistant vice president of advanced solutions for Principal^®. “If you’ve dedicated much of your life to your business and it’s part of your identity, it can be really hard to walk away.”

It doesn’t have to be that way. A thoughtful, thorough succession plan offers benefits for you— helping you figure out retirement income, for example. And it’s good for whoever is taking over—giving them time to figure out how to keep growing the business. The six steps in this succession planning template are key.

Step 1: Put a date on the calendar.

“Someday” isn’t good enough, even if you’re reluctant to give up work that’s intertwined with your identity.

“If you’re the sole owner, it’s not too soon to start thinking about it in your 50s,” Bell says. “That way you give yourself about a decade to develop and implement your plan. If you have co-owners, you’ll want to start even earlier.”

For cofounders of the Iowa-based coffee company BLK & Bold, getting a plan in place early was a no-brainer.

"In having what feels like a lifelong relationship with Rod, my best friend, cofounder, business owner," says Pernell Cezar, cofounder and CEO of BLK & Bold, a Principal client, "it’s still extremely important for us to ensure that what we've built lives on beyond us, and we have thought about that from inception all the way to the decisions that we make on how we stand this business up because every day is a foundational day for the future of this company.”

Step 2: Establish your business’s value.

An informal business valuation is an estimate based on an analysis of the company’s financial position. There are a few ways to create a valuation:

• Asset based, which compares assets to liabilities or net cash value of everything if it were sold.
• Earnings value, which looks at past earnings and makes a reasonable assumption about future projections.
• Market value, which looks at similar businesses and recent sales.

Even if you have no immediate plans to sell, a business valuation is something you can and should update regularly. It allows you to project how much life insurance you might want for business purposes to help protect your family against future loss, for one thing.

Step 3: Figure out who wants the business.

Although family-owned businesses may offer a natural succession starting point, just because you don’t have a family doesn’t mean you can’t find a buyer. “People typically transition out in one of three ways: sell it, give it to someone in their family, or keep ownership but train others to run it,” Bell says.

For the latter choice, key employees offer one option; owners of the competition may be another. If you don’t have someone in mind, a financial professional may help you identify possibilities.

When it comes to successfully transitioning to family such as a child, Bell says, “Think of them not as your child but as a person who’s going to run your business. Do they make good decisions, are they effective at communicating, are they visible and impactful in the community, and do they care about employees like you do?”

Step 4: Hire professionals.

A business succession strategy also includes a tax professional, legal professional, and financial professional. Working with an experienced team may help you accomplish a successful transition.

The sooner you build these relationships, the better. Dr. John Campbell, founder of Campbell Dentistry (a Principal client), says that’s one thing he wishes he’d done when he started his business 36 years ago. “Find someone that can help advise you and guide you from the start of your practice...to the end when you need to develop a succession,” he suggests. We can help you connect to a financial professional near you.

Step 5: Choose the type of succession strategy.

Who takes over your business (and if you’re related to them) may influence whether you sell, gift, or maybe try a combination of the two (PDF). That sale type should also accommodate continuity planning. “Many people haven’t thought about what’s going to happen if there’s an event like a divorce or bankruptcy, and what’s the road map if those events occur,” Bell says.

“Also, think about whether you want an entity purchase plan (where the business buys from the departing owner) or a cross purchase plan [where the other owner(s) buy from the departing owner]. These different arrangements have different tax results for both the buyer and seller. Entity purchase plans were the topic of a 2024 U.S. Supreme Court case, Connelly v United States—so not only is it important to choose the right type of plan, it's wise to do so with the right legal and tax counsel behind you,” says Bell.

Step 6: Do what you can to retain valued employees.

Every step of succession planning helps you ensure the new owner doesn’t inherit a management team or staff riddled by departures. Retention or incentive plans linked to a required service period or specific date following the sale could help ensure a smooth transition. Life and disability insurance for the business owner could help protect those promises made to key employees.

“Keep checking in with your succession plan, especially with key employees, to make sure everyone’s head is in the same place and nothing big has changed,” Bell says. “What made sense when you created the plan may not make sense when you’re closing in on retirement.”