Editor's Note: Here’s an excerpt from Succession Planning: Step-by-Step. Go here to read more. 

A sound dealership succession plan addresses a long list of issues, including retirement income, transferring wealth to the dealer’s heirs, transferring ownership, dealing with the income and estate tax consequences associated with an ownership transfer, and addressing other issues key to the ongoing success of the business; not the least of which (and often forgotten) is transitioning management.

Here are steps to develop a succession plan for your dealership.

Step 1: Identify and prioritize goals for the transition.

Step 2: Identify and prepare new management. 

Step 3: Determine retirement cash needs

Step 4: Review options for funding the transfer

Step 5: Planning for Ownership Succession

Step 6: Identifying Options for Transferring Ownership

Step 7: Integrate Succession & Estate Planning

Step 8: Develop an Implementation Strategy

Step 9: Design a Contingency Plan

The primary goal of a succession plan is to transfer ownership and management to a successor or successors during the dealer’s lifetime.

However, every succession plan should include a contingency plan should the owner die prematurely, become disabled or is otherwise unable to operate the business. The contingency plan answers, “What would happen to my family and business if I’m not here tomorrow?” 

Because a contingency plan considers the present, it needs to be monitored and adjusted regularly. A dealer leaving behind a child intended to take over the business but who is too young at the owner’s death, for example, might have a contingency plan to sell the business or provide interim management until the child is old enough to operate the business.

Whether the business is to be sold or transferred within the family is an important part of the contingency plan. Another consideration is the liquidity to provide for the family should something unexpected happen to the dealer. This could involve using insurance to provide for the family’s needs for cash. 

If an owner’s child is to be the successor, the contingency plan should include how to objectively determine if and when the heir is ready to assume responsibility. And, as always, a plan must recognize the manufacturer’s role in approving any successor.

Steps for designing a contingency plan include:

  • Periodically review the owner’s will to ensure dealership assets are transferred in accordance with their wishes.
  • Determine the family’s liquidity needs in the event of death or disability. 
  • Identify prospective interim managers if the contingency plan is to wait until a child or other successor is capable of assuming management responsibilities. 
  • If there are multiple successors, consider buy-sell agreements to address ownership succession.
  • Purchase disability insurance where there are multiple owners to resolve disputes. The amount of the disability benefits are often less important than the ability to use the insurance company as a third-party to determine whether one of the partners is disabled. If the insurer will pay the disability claim, then the insured is considered disabled for purposes of ongoing management.

10 Steps to Successful Succession Planning

  1. Identify and prioritize your goals.
  2. Identify and prepare your management successor.
  3. Determine your retirement cash needs.
  4. Review options for funding the transfer in light of required retirement funds.
  5. Plan for ownership succession.
  6. Identify options for transferring ownership.
  7. Integrate succession and estate plans.
  8. Develop an implementation strategy.
  9. Design a contingency plan.
  10. Monitor and adjust the plan.