Who’s Minding the Store? How to Develop a Succession Plan for Your Practice

succession plan

When you own your own practice or business, deciding on your succession plan is a vital step. As well as your own peace of mind, it is a step that supports your hardworking colleagues and loyal patients as well.

Look, we all know that thinking about estate planning and our own mortality is not generally great fun. But once it’s done, you’ll realize that it can actually relieve a significant amount of anxiety. Here’s a simple, painless guide for your business estate planning.

Estate Planning for Business Owners

The first consideration when it comes to estate planning is to determine what kind of practice or business you have.

  1. Are you essentially a sole trader and the practice will stop operating when you die or are incapacitated?
  2. Is it a large practice with employees and partners who will want to carry on the business after you’re gone?
  3. Is it a family business that you want to pass on to your family members in the event of your passing?

Many professional businesses such as dentists, accountants, lawyers, architects, and other service providers operate under the sole trader model.

Even when they grow and take on employees, the founder often maintains firm control of the management of the practice. This type of practice can be profitable during its lifetime but does not provide for income for your family or other dependents after your passing.

In larger practices where you have business partners who share in decision-making, the practice can continue after your passing. You can decide who to pass your ownership share to – whether that’s a family member or a business partner.

The third option is a practice that is built with a long-term view to being sold as a going concern. Clearly, this will shape how you run the practice, the systems you put in place and how you manage communication with your patients or clients.

We highly recommend getting legal advice when it comes to your estate planning. It’s a complex area, and a wrong step can result in litigation headaches for your beneficiaries after you’re gone. Do reach out for professional help from a company such as Verhaege Law.

Business Estate Planning

There are four main aspects to business estate planning that you need to consider.

1. Make a Will and Basic Estate Plan

This will cover your wishes in the event of your death or incapacitation as well as specifying a power of attorney and healthcare directive. It will specify who you want to inherit your property – both personal and business.

2. Plan for Tax Efficiencies

Tax planning is an important element of estate planning given that the government can charge both estate and inheritance tax – depending on the particular situation of your practice.

Setting up a trust (or series of trusts for different family members) or creating a family limited partnership can reduce the tax burden on your beneficiaries. If structured correctly, the benefits from your insurance policy can pass directly to your beneficiaries. Otherwise, such funds can be held up in probate and cause financial distress for your loved ones.

Again, the taxation and estate planning regulations are a complex and ever-changing area, so do seek the advice of a professional.

3. Make a Comprehensive Succession Plan (see below)

Whereas your will and estate plan lay out your wishes, the succession plan is how that all gets implemented. Giving it serious consideration now can ease the transition for your loyal team. If you want the business to continue after you’re gone, this is key. Please see the separate section below for more detail on succession planning.

4. Purchase Life and Disability Insurance.

Life Insurance is a must for practice and business owners. It gives your family (or named beneficiary) a source of income when you die or become disabled. You can also purchase a second life and disability insurance policy (Key Person Insurance) with your company as the beneficiary. This enables the practice to pay employees, maintain cash flow and start to transition.

Liability and indemnity insurance may also be relevant. Even in cases where the business is terminated, it’s important to have liability insurance in the event of any claims from past patients.

Creating a Succession Plan

One of the main issues to decide when it comes to estate planning is your succession plan. Here are a number of questions for you to consider in formulating your succession plan:

  1. Who do you want to handle the business when you’re no longer able to?
  2. Do you want them to prepare the practice for sale?
  3. Or do you have ambitious growth plans, that you would want your team to carry on with?
  4. What will the new organizational chart look like with you no longer in it?

These questions are not easy to contemplate, but the more you do it now, the easier you make it for your team later. Imagine you are killed in a sudden accident; your team will be reeling with shock and unable to think straight. To have a document and clear process to follow will be incredibly valuable to them.

As with your will and estate plan, it is vital to keep the succession plan updated. You’ll hopefully be around for a long time to come – so as those growth plans get achieved, you’ll need to update the succession plan accordingly.

The succession plan itself is formulated along the lines of your business plan. It will include the organization chart, company direction, your marketplace, client care and any training or development you foresee people needing as they step into new roles. It will also include details of the transfer of ownership, and clarify and changes in how the practice is to be managed.

Next Steps

Considering your succession plan is such an important, if uncomfortable, step. Once it is in place though, you will have much greater peace of mind.

Your next steps would then be to discuss your plans with your key personnel and team members. This will help them understand and be able to implement your wishes if the unthinkable should happen.

We invite you to think about a happier alternative as well – that of your retirement planning. Check out our advice on tax-free retirement for dentists.