Succession planning is one of the most important responsibilities of a manufacturing business owner. By identifying and grooming future leaders early — whether family members, internal managers or an outside successor — you can create a smoother handoff and help safeguard your company's operational integrity.

Planning well ahead of your expected exit also gives your successors the opportunity to learn the business gradually, understand its financial demands and develop the relationships that will help sustain it after you're gone. Let's take a closer look at a few questions you'll need to answer when developing your succession plan.

What are your goals?

The first step in forming your succession plan is to define your goals. Common examples include:

  • Securing future financial stability for the owner, family members and the business,
  • Keeping the company in the family (if your manufacturing company is a family-owned business),
  • Treating children fairly, whether or not they work for the business, and
  • Giving valued employees an opportunity to step up and share in the company's profits.


If you want to be succeeded by your adult children or another family member, talk to the younger generation to gauge their interest and identify their skill sets. If someone is pressured to take over, your manufacturing company will likely suffer. Everyone must be on the same page about future roles, responsibilities and the corresponding financial rewards.

To whom will you transfer ownership shares?

If you don't want to sell to an outsider, you'll likely want to transfer your manufacturing business to family members, employees or a combination of both. Family ownership transfers are often done through a gift or sale. The right choice depends on a variety of factors, including whether you'll need retirement funds.

Gifting can make it easier to shift responsibilities for debts or other liabilities while also reducing your taxable estate. Then again, if you go the sale route, you'll have multiple options for structuring the deal. An installment plan, for example, could work as an annuity in retirement.

Be aware that your manufacturing company's purchase price will probably be less for family members than if you sold the business to a third-party buyer. But internal transfers can help mitigate some of the risks associated with outside ownership, such as culture change. There's also a better chance that you can retain some control through, for example, voting shares.

Stock redemptions offer another option. Under these arrangements, the company buys some or all of your shares, increasing the ownership of the remaining shareholders. For instance, if you have an 80% interest and your two children each have a 10% share, you can sell your stock back to the company, resulting in each child having a 50% interest. Redemptions must be carefully structured to avoid weakening the balance sheet.

A stock redemption might be required under a buy-sell agreement. Such agreements often calculate the stock's price according to an agreed-upon valuation method.

Additional transfer options include recapitalization and employee stock ownership plans. Every option has pros and cons, including tax implications.

Do you have a training program in place?

Few designated successors are ready to drop into a company's top position on a dime. Proper preparation is vital — and it's not an overnight process.

A comprehensive training program will help reassure your lenders and customers that leadership in your manufacturing company will remain competent, knowledgeable and trustworthy. Evaluate your potential successors for gaps in skills or other qualifications so that you can address them in advance.

The gaps might call for continuing education courses, on-the-job training, long-term mentoring and, finally, hands-on leadership experience. Responsibilities such as directing staff and interacting with lenders and customers can then be gradually handed off.

Ready to pass the baton?

If your retirement is on the horizon, a sound succession plan can help protect your manufacturing company's long-term health and ensure the legacy you've built can continue to thrive. Contact us if you have questions about creating a succession plan.