In early 2007, CEO David Kalt began thinking about the next stage for himself and his firm, optionsXpress. Passionate about starting new businesses, Kalt had co-founded optionsXpress in 2000 and helped grow the company -- an online broker specializing in options and futures -- into a $1.5 billion publicly traded firm. Believing that his skills were better matched with starting new companies than they were for growing existing ones, Kalt asked the Board to start focusing on the next generation of leadership.

Fortunately, optionsXpress already had talent in place. CFO David Fisher had been hired shortly before the firm's 2005 initial public offering, and was being groomed for a senior leadership position. In turn, Fisher had hired a seasoned VP of finance who could easily assume the CFO role. Upon Kalt's request of the Board, Fisher and the VP of finance moved up into their new responsibilities, and the company continued to grow. This allowed Kalt to leave the company in late 2007, well ahead of his target date.

Like optionsXpress, nearly all businesses -- from the largest corporations to the smallest family-owned companies -- can benefit from succession planning. Still, for a variety of reasons, many entrepreneurs delay this process and, in some cases, never engage in planning for succession. In fact, one survey of CEOs found that well over half (55.9 percent) had not put a formal succession plan in place.

Succession planning is particularly important for owners of privately held businesses. Like all senior executives, they need to ensure that their companies can thrive without them. Yet, these entrepreneurs must often rely on their ownership interest in the company to fund their retirement. Therefore, succession planning and liquidity planning are intertwined and critical to the future of both the business and the entrepreneur. Below are four essential steps that founders can take to address these dual issues.

Step 1: Start early
A workable succession plan takes time to implement, often unfolding over a multiyear period. Moreover, succession planning is not a one-time exercise. David Fisher, the new CEO at optionsXpress, notes that his firm is already looking for his successors, in a continual process of grooming the next generation of talent.

Step 2: Continue to hire strong talent
The management succession at optionsXpress went smoothly because the company had hired strong management in the key positions of finance and operations. Keep in mind that your bench can never be too strong or too deep.

Step 3: Set goals and expectations
You must establish well-defined guidelines for your successor's role during the transition. What will his initial title and responsibilities be? If all goes well, at what point can she expect to take on leadership of the company?

Step 4: Consider liquidity options
If you want to pass the baton to the next generation of managers, consider ways to help them either purchase your share of the company or take some of your money off the table. For most private company owners, liquidity planning is critical to their succession strategy.

Here are some alternative liquidity options to consider:

Private investment
You may decide to take liquidity out of your business by selling part of your company to a private equity investor. Many private equity investors will want you to continue playing a role in your company for the duration of the investment and will help you find and groom your eventual successor, while others will prefer to install their own team. Be sure you know the philosophy of each private equity firm before making your choice.

IPO
Going public can make it easier for founders to sell once the lock-up period has passed. In the interim, however, a CEO's ability to sell shares may be constrained. Even when sales by CEOs are allowed, they can adversely impact the market value. Thus, when a CEO owns a substantial share of a company's value following an IPO, it may take several years to realize full liquidity.

As a result, some CEOs of companies preparing to go public will reduce their role in the business prior to the IPO by bringing on a new executive as president and remaining only as chairman. As the ex-CEO's role changes, he or she will have progressively more freedom to sell stock in the company.

Strategic acquisition
In some cases, strategic acquisitions can work as a way to both generate liquidity and ensure the continuity of your business after you leave. Typically, this occurs when an acquirer is in an industry close to yours and already has people inside its organization who can manage your company. Acquirers who are seeking to expand into new markets, businesses, or geographic territories are more likely to want you to stay on with the company.

Overall, the key point to remember is: However you structure your succession and whatever liquidity strategy you choose, the two processes are inextricably linked. Your company's future -- and your future -- depends on your ability to develop a workable succession plan for your business.

Bruce R. Evans is a managing partner of Summit Partners, a private equity and venture capital firm with offices in Boston, Palo Alto, and London. Since 1984, Summit Partners has invested in more than 290 growing, profitable companies across the United States and Europe. Bruce can be reached at 617-824-1000 or bevans@summitpartners.com.