Succession Planning for Small Businesses

Getting a business started takes a lot of effort. Some entrepreneurs might be too focused on the present to consider what may happen further down the road. Business succession planning, like estate planning or divorce planning, can get overlooked in the excitement of starting up and moving forward. Without an exit strategy, business succession can be a legal nightmare for the participants.

This article explains what a business succession plan is, why you need one, and how to develop a strategy for your business that ensures it moves forward even if you’re no longer there to guide it.

The Business Succession Plan

A business succession plan is a legal process that lays out an action plan for transferring ownership of the business and assets if the owner or any high-level officer dies or is unable to continue working. Each business should have a specific succession plan to ensure that business operations continue after the principal or owner leaves. For instance, a law firm might need to name a new senior partner, while a restaurant might have to replace key employees who left with the departing individual.

A succession plan is essential for any business, keeping the business operating after any upheaval or major change in the business structure. A good succession plan should have provisions for all of the following:

• Helps ensure business continuity: Your plan designates who takes over, who has authority to do what, and when the changes take effect. It avoids too much downtime while remaining officers and staff try to figure out who’s in charge of what.
• Preserves your legacy and business value: The plan maintains the business valuation and reassures customers, employees, and lenders that nothing has changed within your business operations. This stability keeps your business from collapsing after a transition.
• Prevents costly disputes: Ownership transitions can create legal disputes among potential successors, especially in small companies and family-owned businesses where everyone has a stake in the outcome. Clearly designated leadership roles and a carefully written plan can avoid some of these arguments.
• Provides for your retirement: Having a good succession plan can be a key part of your overall retirement plan. Having a proper turnover in place can make walking away significantly easier.

When you begin making a business succession plan, consider discussing the steps with your business attorney and financial planner. There are legal and tax considerations involved with the plan formation, and an attorney can advise you on what you need to do first.

Elements of a Successful Business Succession Plan

A succession plan doesn’t need to wait until a principal dies or is severely incapacitated before activation. Give some thought to when and how your plan may go into effect, and what may cause it to be rescinded. Some things to consider:

• Triggering events: A triggering event is something that makes the successors activate your plan. It could be the planned retirement of a principal or an emergency such as an unexpected death or serious illness. The plan could include things that might take the principal away from the business for a long period of time, like divorce.
• Successor identification: This may include immediate named successors, such as who will replace the absent principal, and how stakeholders will replace them in the long term. In corporations, successor identification may include emergency board meetings.
• Business valuation: The demands of business rarely pause for personal issues. The plan should include an evaluation at the time of its creation and a method of calculating the business’s value during the changeover or sale if such occurs.
• Transfer of ownership: If the principal was the sole owner or principal shareholder (as in a closely held business), then a buyout may be necessary to transfer the company to key employees. Making sure there’s funding for the sale can require other financial planning arrangements.
• Transfer timeline: To ensure a smooth transition, have a schedule for how the handover will occur and on what timeline. If the handover happens when the principal steps down, a sequence of training programs to bring others up to speed is a welcome addition.

As you can see, planning a business succession is no simple task. Consider working with a small business attorney to make sure nothing is overlooked.

Succession Planning Strategies

Depending on when and how you plan to step away from your business, you’ll have a number of different options. Let’s take a look at some of the most common for typical small- and medium-sized businesses.

Internal Transfer Within the Company

If your business has several owners or partners and you want to ensure the organization remains functioning, an internal transfer is a good option. This strategy lets the remaining partners buy out the departing partner or owner when they leave. Common terms include a lump sum buyout, quarterly or annual payments, or other assets. You may need to discuss tax planning, as there could be estate taxes or capital gains taxes involved with this type of sale.

Having a buy-sell agreement for business succession can ensure there’s a smooth transfer. When both the departing parties and those remaining have their roles and contributions clearly defined, transition becomes much easier.

Family Member Transfer

In family-owned businesses, family member transfers are common. This keeps the valuable business within the family and avoids family disputes when an owner dies or needs to step down. As with internal transfers, there may be tax implications when property is transferred to others. Your attorney or financial planner can help you avoid any issues of estate taxes.

More information about gifting, selling, or using business trusts to transfer business interests to your family members can be found at Findlaw’s Transferring Your Business to Family Members: Legal and Tax Strategies article. Taking the time to construct a sturdy transfer method can make a huge difference during what may be a trying time.

Emergency Succession Planning

Part of the strategic planning process includes having an emergency plan. If the owner or principal is unable to carry out their duties, your business needs a plan for who should take over and keep things running until they return. If the owner can’t get back, the plan needs to account for that and create a framework for restructuring the business in their sudden absence.

The emergency succession plan may be only a part of the overall succession plan, an appendix or addendum to your ideal plan. In a worst-case scenario, your successors can use it to keep things running. You can find out how to do this in FindLaw’s What Happens to Your Business If You Die? The Importance of Emergency Succession Planning article.

Third-Party Sales

In some cases, you may need to sell your business outright. This could be the instruction you leave as part of the emergency succession plan. Alternatively, you could arrange the sale of your interest ahead of time, with the triggering event being a specific event like your death, divorce, or retirement. Sole proprietorships and small companies may benefit from these advance sales. If you have a thriving business with a few employees and want to protect it if you’re unable to continue operating it, this may help.

Do You Need An Attorney’s Help?

Succession planning is not a do-it-yourself project. Depending on what you want from the outcome (retirement funds, avoiding family drama), getting legal assistance is a good idea. Transferring business ownership and responsibility means filing numerous legal documents in the right places.

You’ll need an attorney’s help for:

• Drafting and filing legally binding purchase contracts, buy-sell agreements, trusts, and financial documents
• Managing tax implications and minimizing possible estate tax and transfer taxes
• Keeping your plan compliant with state and federal business laws
• Meeting filing deadlines

An attorney can also act as a neutral third party if there are disagreements between partners, family members, employees, and others involved in the process.

Get Legal Advice From a Business Law Attorney

Nobody wants to think about the end of their business career, but it’s going to happen. You can ensure your hard work survives after you leave by having a solid business succession plan in place so your partners and family members have a blueprint to follow when you step away. An attorney will work with you and your partners to ensure your plan gives everyone the process they need to keep the business active. Your life’s work deserves a secure future. Contact an experienced small business attorney to create a succession plan tailored to your unique goals.