Helping You Do Business Right

Business succession planning: A few things to think about to get you started.

On Behalf of | Dec 20, 2018 | business law

If you are like a lot of business owners, you have put in countless hours over a number of years to build your business into the enterprise it is today.  You’ve put in way too much time and effort to let your business wither or fall into the wrong hands when you retire or die.  You want it to continue to provide the service or product it now provides and to employ the people who have worked alongside you to build and manage it.  You also want its value to be there for your heirs.

Savvy and concerned business owners take steps to prepare for succession–that is who will own and run their business when they have retired or died. They develop a business succession plan with a transparent process for choosing a successor to run the business as well as a written governance plan for the business. In addition to governance, these business owners know the plan should also discuss ownership of the business and the tax implications of any transfer of that ownership.

Business owners can further protect the future of their business during the succession process by considering a few overall issues and avoiding some common mistakes. The first issue is who is the right person to run the business when the current owner/manager is gone.  At first, there is no need to name a specific person who will run it, but it is good to consider the category of person who would be best.  Are there family members, whether children, siblings, nieces or nephews who are involved in the business and would be good candidates?  Are there employees that stand out as good candidates, or are there competitors, customers or suppliers that know your business well?  

Once you have considered the general category of owner, you can narrow in on the individual candidates.  In doing so, try to avoid some of the most common issues that arise during this stage of business evolution:

  • Family issues. Family disputes can cause problems during a management transition. Mitigate this risk by starting discussions about the transition process well before it begins.
  • Generational transition. A recent publication in Forbes notes only 33 percent of family businesses successfully transition to the next generation. This may be in part due to the disputes noted above, but also due to a lack of proper training and preparation of the next generation. To better ensure success, choose a successor wisely. Look for an individual that has the experience the business will need for its future growth as well as an interest in the business’ success.
  • Competition. Although it is likely more than one candidate will be in consideration to take control of the business, avoid fostering too much competition. This can result in an overly competitive environment and deteriorate the business culture. Reduce this risk by being transparent with the consideration process.

A second issue is who will own the business when the current owner is gone.  Naturally, this is related to and depends on who will be running the business.  One natural candidate to own the business will be whoever is running the business at that point. However, ownership of the business does not always have to be transferred to its managers.  It may be that the best candidates to run the business either don’t have the ability or the desire to buy it. However, if the person or people running the business after the founder is gone are not also the owners of the  business, it will be necessary to set up a road map for how the owners and managers are going to work together for the best interest of the business.  This may involve changes to bylaws or operating agreements or special classes of stock that are issued to the managers.

Once the new owners have been identified, the current owners can begin to put in place the documents, either a will or trust (for a transfer to heirs) or a buy-sell or other acquisition agreement (for transfers to employees, competitors, vendors, customers or other third parties) that will bring about these plans.  It is useful as well to consider how any purchase of the business, if that is part of the plan, will be funded, whether through the use of life insurance or borrowing and to make plans in advance for that funding to be secured.  

Use these tips, along with a succession plan drafted to your business’ needs, to better ensure your business’ future success.  You have put a lot into getting your business to this point, and it is a good idea to put in some time now to plan for its life after your departure.