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To preserve that hard work you put into your business, it is important to plan for when it’s time to step away. This could be a plan for retirement, a potential death, or some other unforeseen circumstance. Business succession planning is the key to ensuring a smooth transition, preserving both the company’s stability and the owner’s financial legacy.
More than just an exit strategy, a well-crafted succession plan combines planning for a business’s continuity with standard estate planning. This allows you to address leadership transitions, tax implications, and any legal considerations. By planning early, business owners gain the flexibility to prepare successors, protect company assets, and secure their long-term vision.
Business succession planning is twofold: It combines planning for a business’s longevity with estate planning for business owners. The goal of a succession plan is to ensure a business continues to run smoothly in the event the owner passes away or becomes disabled. Succession planning early gives owners the benefit of time to prepare any parties involved.
Succession planning ensures your business is prepared to succeed beyond your leadership. You are able to prepare for your business with future leaders so there is no crisis in the event of a death or disability.
What your business succession plan looks like will depend on what your business looks like and who is involved. A key question that sets up what succession planning looks like is whether you want to sell the business or transfer it to someone you trust.
Having an attorney at your side while creating a succession plan will ensure all the necessary decisions are made. And it will ensure that proper documentation is prepared so your plans are properly carried out. Speak with an attorney here at Grieve Civil Law to be confident you are in good hands.
Below details some key topics to consider as you prepare:
When making the decision of whether to sell or transfer a business, it is helpful to know whether you have an asset business versus a service business.
Asset businesses do not require significant professional qualifications or educational degrees to manage. They hold their value in their equipment, real estate, brand, or products. An asset business is easier to sell or transition because it is easier to find an investor, buyer, or assignee.
Service businesses then hold their value largely in the aptitude, qualifications, and motivations of its human operators. These businesses are harder to sell, especially if the main human operator keeping everything running smoothly is you. This does not mean these businesses are less valuable overall. Service businesses require a greater amount of planning to effectively transition, including a greater need to find the right qualified successor sooner rather than later.
This is a general question. Do we need to find a buyer now or later? Does it make sense for a passionate, internal employee to take over or buy your business, rather than selling it to an unfamiliar operator who may be tough to find?
If you are not passing your business on directly to your children, who will be in charge of managing it and/or managing their inheritance? If the business will be sold after your death instead of during your life, who is a competent, wise person who will be in charge of selling it? Do you want to put that burden on your family? A trust, as well as other internal company documents, may be needed to address these issues.
You must ask yourself if your children are capable of effectively managing the business. If so, management and ownership could pass to them directly. However, it may be wise to consider putting another trusted professional or family member in charge of running the business. Then your children could receive the ownership profits as passive income without having to be personally involved in managing the business.
No matter who you pick, it is also important to think through how their successor would be chosen in the event of a retirement or death. This could be picking a backup or deciding on a plan to find a new candidate, such as a company job search for a candidate. Both a family trust and internal company documents can be used to put this framework in place effectively.
If you have no person or trusted employee in mind to take over or buy your business, you still have options. You can consider approaching a competitor about a merger or outright sale, or consult a business broker to search for a buyer on your behalf. Don’t forget to consult all of your business, professional, and personal networks, as you feel comfortable, to help come up with options.
Ultimately, the price comes down to fair market value, which is what a ready and willing buyer would pay at a specific time. But there are various ways to get the valuation of a business.
If a valuation is done after the owner passes away, often a business valuator is hired to evaluate the business professionally. Another potential option if parties are in disagreement is to take the average of multiple appraisals.
Whether you sell the business or transition it to a new owner, this can be done either during your lifetime or after you pass away. A benefit of doing it while you are alive is you have direct control over it. That way you aren’t relying on future humans to handle it correctly and hoping it is done according to your wishes.
If you operate your business with other owners, plan for what happens if one owner dies, but the other(s) continue running the business. There may be a stipulated and planned buyout of the deceased owner’s interests from their family.
One option is to pay out the deceased owner’s portion of the business at fair market value as assessed by a professional appraisal. Payments like this are often made over three years or so to alleviate the financial burden on the business’s continued operations.
Business partners often take out life insurance policies on each other, to provide funds for paying for the buyout of a deceased owner’s family. A life insurance trust is sometimes used to facilitate and stabilize such payments if and when the time ever comes.
If your business owns real estate, you may need to create a separate holding company for the business’s real estate. There will need to be a plan for its transition, with or without the business continuing to operate there. For example, one option is to sell the real estate separately to capitalize on its equity and move the business to a new location.
When selling any real estate, it is important to be aware of your tenant leases. A third-party buyer may or may not want to be under the lease terms you have in place.
Or, if you rent or lease a location needed to continue the business’s operation, that will need to be accounted for. In a transition, making sure that any lease’s renewals are planned out with your landlord is key. Your business doesn’t want to risk losing its location.
What internal company documents you need depends on the type of business entity you operate. The documents needed for a corporation with a shareholder’s agreement will be different than for an LLC with an amended operating agreement between its member-owners.
At a minimum, every owner needs a will stipulating how to transition your business after your death. You may also want to consider a business power of attorney. With this, if you are still alive but have lost your mental faculties, a trusted person can still manage and/or sell the business on your behalf.
A key part of succession planning is appropriate estate planning. Wills and trusts are both effective modes to transfer property upon death, but trusts are more commonly used by business owners. To determine what is best for your situation, speak with an estate planning attorney.
A will provides clarity on how you want your assets distributed after dying. Creating a will does not allow your estate to avoid probate. Wills allow you to appoint a guardian to any children and can be edited as situations and assets change.
Trusts provide extra privacy and save your estate money because they avoid the probate process. Placing a business in a trust provides seamless transition to your selected beneficiary. Businesses are often placed in separate trusts from other aspects of your estate to prevent the comingling of personal portfolios.
Many times those who own businesses have complex estates, and trusts are more prepared to deal with complex estates.
Contact one of our estate planning lawyers to create your business succession plan
