Importance of Business Succession Planning at the Beginning
Provided by HG.org
Business succession planning is the process of deciding what will happen to your business when you no longer are able to or desire to run it. While many people think of business succession planning when they are nearing the end of their career, it is important to consider business succession when the business is first established.
Considerations Involved in Business Succession
Business succession is concerned with how ownership will pass from one person or group to the next. In partnerships, the business may simply pass to the remaining partner who may buy out the retiring partner’s share. In family businesses, the business may pass to an adult child or other family member interested in the business. Other businesses may allow a business owner to sell his or her remaining shares according to a specified formula or approach.
Complications with Deciding Succession in Crisis
Waiting too long to consider business succession can result in significant adverse consequences to the business. If a person loses capacity, he or she may be ousted from the business with no word on how the business will be handled. A deceased business owner can cause the business to go into a tailspin as the remaining owners or officers scramble to keep the business afloat. Even if these situations do not arise, the end of the owner's role in the business may be met with hostility or negative feelings. Rather than waiting for disaster, business owners can take proactive steps to protect their business and their legacy.
Steps of Business Succession Planning
Business succession planning often includes a multi-faceted approach. Some of the steps may include:
Determining the Successor
Business owners may want to pass the business onto their children, other relatives or business partner. However, these options may not always be available. Adult children may have their own chosen careers. A business partner may decide to retire before the remaining business owner. A lawyer can discuss the possible ways to pass the business to someone while the business is first being formed to avoid problems down the road.
Evaluating Business Interests
Clear guidelines should be in place to determine the owner's financial interest in the company so that he or she can be fairly compensated for the business interest. It is vital for this evaluation method to be determined during the business formation stage. At the time of succession, the parties have competing interests. The person leaving the business will want to maximize the value of his or her interest in order to have more money at the time he or she leaves or retires. The person buying out the owner will want to minimize this amount to keep more money in his or her own pocket. The parties may decide to base the value of the business off of a professional appraiser’s opinion, the value of the shares, as a multiplier of some objective criterion or another method. The important part is for the parties to agree about this evaluation ahead of time.
Establishing Procedures for Succession
A clear business plan should indicate when the ownership will transition. For example, procedures should be put in place in case the business owner loses capacity or wants to leave the business. There may also be a specified right of first option for the remaining business owners to be able to buy out the leaving owner’s share before he or she can sell to an outside party.
Planning for the Future
A training program may be implemented that helps train the successor on the important aspects of the business before he or she is given control. The business owner may be allowed to select his or her replacement if management will be handed over to a new addition to the business. The business owner may receive residuals from the business for a certain period of time in accordance with the agreement. These considerations can help provide greater clarity to all involved parties when the time comes for business ownership to change.
Seek Legal Assistance
There may be many options available to a business owner, such as selling the business, receiving residual income from the business, passing an interest to a person of his or her choice or establishing a family limited partnership. If you would like legal advice on the options that may be available for your business, you may wish to contact an estate planning lawyer who is familiar with evaluating a business interest and who can explain the various options available to you.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.