The most resilient businesses are ones that expect the unexpected. Life-altering events like Death, Disability, Divorce, Disagreement, and Distress — which are known as the “5 Ds” of succession planning — may be unexpected, but that doesn’t mean you can’t plan for them. While no succession plan is foolproof, you can stay on track if you craft your succession plans with the 5 Ds in mind.

5 Ds of Succession Planning

Before we dig into the solutions, let’s review what the 5 Ds are:

• Death: The unexpected loss of a key leader or decision maker in the business.
• Disability: A health issue that causes a key leader to be incapacitated or unable to perform their duties.
• Divorce: Divorce of one or more of the business’s leaders.
• Disagreement: Conflicts among business owners, or conflicts between owners and another stakeholder (like banking partners, investors, key suppliers, etc.).
• Distress: When the business is operationally or financially taxed.

Strategies to Combat the 5 Ds

The 5 Ds have the power to affect the continuity of your business. Here are a few things you can do to combat these disruptions.

Think of the end at the beginning

As you’re creating or building your business, formulate an exit strategy. It may feel strange to think of your exit when you’re just getting started, but the sooner you can plan for it, the better off you’ll be. Doing so will give you time to:

• Align your business goals with personal goals: Your small business may be its own entity, but as the owner, you’re likely using it to achieve one or more of your personal goals, whether that be to boost your lifestyle, build your legacy, or something else. If you think of those personal goals at the onset of your business, you can build an exit strategy that supports those goals.
• Identify your successors: Identifying a successor can take years. Give yourself time to find the right fit, and groom them to take over when the time is right.
• Maximize business value: If you’re looking to sell your business, you’ll likely want to leave when your business is valued at its highest. If you give yourself time, you can plan your exit to be at a time when valuation is ideal.
• Preserve business continuity: A seamless transition isn’t going to happen on its own. If you can plan for your exit, you’ll reduce operational disruptions and maintain the trust you’ve fostered with employees, customers, vendors, and other stakeholders.

Succession planning is more than thinking of your exit

Your exit plan requires you to think strategically throughout the life of your business, and from many different angles. A few other areas that deserve your attention are:

• Taxes: What does your tax position look like? Talk to your CPA to flesh out your tax strategy now so your business is in its strongest tax position when you’re ready to leave.
• Your estate: Your business may represent a large portion of your wealth. Make sure it’s considered in your estate plans.
• Your business’s position in the marketplace: It could be beneficial to survey the market. If you know market conditions, the value of your assets within the marketplace, and your growth potential, you can plan for a strong exit.
• Specific transactions: Business transactions like mergers, acquisitions, divestitures, or large asset sales and purchases can alter the future of your business. Meet with an advisory team who can make sure those transactions are done in a way that serves your goals.

Being flexible is key

Small businesses should almost never settle on one strategy. As they move through the lifecycle of their business, those strategies should shift and adjust in response to external factors (like new tax laws or changes in marketplace conditions) and internal factors (like unexpected disabilities or disagreements with business partners). Be flexible, and change your succession strategies when needed.

Prepare For the Unexpected

The life events that we think of as “unexpected” are actually nothing of the sort. The 5 Ds are common occurrences that affect most people at some point in their lifetime. We may not know which of the 5 Ds will affect us or when, but we should know how to respond when one does.

If you want to discuss how your strategy should change or how it addresses the 5 Ds, contact us today.