If the pandemic has taught us anything, it's that life is fragile and that its always best to be prepared for the unexpected. Unfortunately, most entrepreneurs have not given much thought to what would happen to their business in the event of illness, death, disability or even just retirement. This results in chaos and instability for the business when these events in fact occur. All this mess can be easily avoided with some basic planning and preparation.
The PWC 2021 US Business survey indicates that 67% of family-owned businesses already have members from the next generation working for the business, and more than 54% of businesses in the US anticipate being family owned and controlled in the next 5 years. Despite this, only about a third of businesses have a properly documented succession plan in place. Perhaps it is natural not to want to think about worst case scenarios, but in the event that the worst-case scenario materializes, the impact on your family and your business can be overwhelming.
THE PERILS OF NOT HAVING A BUSINESS SUCCESSION PLAN
Despite having a business that is thriving, the inescapable reality is that one day you must hand it over to someone else: to your family, your employees/managers, a third party or a combination of all three. Given that the transfer is inevitable, the best thing you can do is to proactively plan it and be a part of it.
Not having a concrete succession plan in place carries many risks. The intended owners/operators of the business may not gain legal control of it- the court is unlikely to look kindly upon implicit agreements. Tax planning options can be negatively impacted for both the business owner and their estate. Exiting suddenly and without any transitory leadership can damage pre-existing business relationships. With proper legal counsel, you can be safe in the knowledge that your business is protected.
A good transition plan should start by asking the following questions:
- Barring any unforeseen circumstances, how long does the business owner plan to stay? When he retires, will the retirement money come from the business or be independent of it?
- For family-owned businesses, what are the intended power dynamics? What will the nature of transition be to the children?
- What mechanisms, if any, will be put into place to ensure that everyone is on the same page both at the point of transition and at a later date, if any issues arise. In terms of dispute resolution, the role of outsiders needs to be evaluated and agreed upon.
- How and by whom will existing clients be managed during the transition?
- What means are being used to transfer ownership- is the business being sold to managers, a third party, or being given as a gift to the owner's children?
- How will voting rights be allocated?
- What happens when and if people want out?
- How does the owner's estate plan need to be altered to ensure that everything happens as planned?
- How is existing tax liability to be paid off and how can estate tax exposure be minimized?
Although most transitions are achieved through formal written documents, informal documents are also frequently utilized to preserve company goals and family values. Some companies even have succession meetings on an annual basis, which serve as both an opportunity to discuss succession plans as well as to groom successors to think and act like the future owners that they're destined to become.
WHAT SHOULD A SUCCESSION PLAN CONTAIN?
As one can gauge from the discussion above, there is no "one size fits all" approach when it comes to a succession plan. What an ideal plan should look like varies significantly with the particular type of business and its goals.
The challenges that inevitably arise as a result of a transfer of ownership are almost always due to communication problems, trust issues and mismatched expectations. All this can be avoided by hiring competent legal and financial counsel. As a general guide, it is important to ensure that a succession plan contains the following:
- Timeline: It is essential to define when succession is due to take place, either by reference to a specific date, or in the event of a certain outcome occurring (such as death and disability, for example.
- Naming a Successor: Assuming the business will not be sold to a third party, but instead be taken over by someone within the company, then that particular person or persons must be identified.
- Business Continuity Plan: A detailed strategy needs to be in place for the day to day running and operation of the business during the transitory period. This will entail an analysis of essential vs. nonessential operations, as well as some reflection over which positions are going to be most impacted by the shift.
- Standard Operating Procedures Documentations: To ease transition, all SOP should be well documented, ideally in instruments such as the Employee Handbook and Operations Manual.
- Valuation: The business must be subjected to a formal valuation, and this valuation must be continually updated to reflect the real market value of the business.
- Funding Succession: In the event of a third-party purchaser, it is important to document how the successor will purchase the business. This can be done by using life insurance, taking out a loan, or using seller financing.
Given how important succession planning is, it is unfortunate that it is one of the most neglected aspects of a business. Experts recommend getting everything in order at least 5 years before you plan to retire, but really, under the current circumstances- the earlier the better! Hiring competent counsel might just be the difference between ensuring a smooth transition when the time comes versus ruining your business reputation due to mismanagement and lack of preparation.
What are vou waiting for? Do not repeat the mistake that so many others have made. Contact The South Texas Business Lawyers for all your business needs!
Disclaimer: This article is made available for educational purposes only, to give you general information and a general understanding of the law, not to provide specific legal advice. By using this article, you understand and acknowledge that no attorney-client relationship is formed between you and The South Texas Business Lawyers, nor should any such relationship be implied. This article should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
Discover the Secret to Solving Any Legal Challenge in Your Business- FREE Private Facebook Group
Don't let legal issues destroy your business - get the legal support you need to stay PROACTIVE in this Free Private Group, "As A Texas Business Attorney", Limited Slots Available.
Fill out your information here and we will get you in!