Business Succession Planning Attorneys: Creating a Succession Plan

If you are a business owner, then you have likely dedicated a significant portion of your life to building your enterprise from the ground up.

But no one lives forever, and at a certain point, you will have to begin thinking about what will happen to your business once you die, retire, or become too incapacitated to stay in charge.
As with many aspects of retirement and estate planning, it can be tempting to kick the can down the road. After all, nobody likes to contemplate their own demise.

However, when it comes to business succession planning, it is absolutely necessary to do so. Your business, if it is successful, will outlive you, and this raises the unavoidable question of who will take the helm after you. Strong and careful business succession planning can mean the difference between an orderly transition of power and a chaotic fiasco that hurts everyone involved.

Business succession planning can be complicated, but you shouldn’t be intimidated: if you’ve had the courage to step into the unknown and start your own business, there is nothing in the process of business succession planning that should be beyond you.

When Do I Need to Begin Business Succession Planning?

Business succession does not just occur with the death of an owner. If you plan to leave your business for any reason, including retirement, disability, incapacitation, or even a conflict with partners, you will need some plan of succession.

The period during which you will most likely put the maximum amount of effort into your business succession plan is during your middle years, one to two decades before retirement. (Let’s say your late 40s and early 50s if you plan to retire around 65, although your specifics may vary.)

However – and it might not surprise you to hear us say this – the best time for you to begin planning is right now, no matter your age. It is never too early to start. While retirement is generally a planned event, death and disability can strike at any time.

Even if you do not create a fully fleshed out business plan right now, it is better to have something than nothing. But of course the more you plan, the better off you will be.

What Can a Business Succession Plan Do?

Creating a business succession plan

The primary purpose of business succession planning is ensuring an orderly transfer of power from yourself to your chosen successor, but this is not the only purpose. Indeed, a good business succession plan is like a Swiss Army Knife, able to fulfill several purposes at once.

The purposes of business succession planning include:

Choosing a Successor. Business succession necessarily raises the question of who will be the successor. A good plan will allow the business to pass to someone you trust, rather than risking it falling into the hands of a dangerous or untrustworthy party.

Estate Planning. If you are a business owner, then it is likely that a good portion of your assets are tied up in your business. To this end, a business succession plan is a necessary part of an estate plan for any business owner, just as much so as a will or trust, and will help make the remainder of your estate planning easier.

Valuation. Business succession planning will ensure that you or your heirs receive a fair value for your share of the business. Conflicts over value can dominate the business succession process if not properly planned for ahead of time, and that is why the valuation is such an important step.

Minimizing the Tax Burden. A good business succession plan will allow you to minimize, to the greatest extent possible, the tax burden that you or your heirs will face. There are a few taxes which may apply, one of the most prominent being the federal estate tax. The threshold for the estate tax (11.4 million as of 2019) is high, but rates can go as high as 40% once it is met. A good business succession plan can help you prepare for these sorts of tax issues.

Expediting the Process. This is important for a couple of reasons. First, a long, protracted, and acrimonious business succession is stressful for everyone involved. But it may actually harm your business as well: if the business is in a state of long-term chaos, or if it cannot immediately be reimbursed following the departure of one of its owners, then this can lead to the business going into debt or falling apart entirely. It is in your interest to ensure that a business stays in limbo for as little time as possible.

Who Should I Choose as a Successor?

This is the million dollar question, literally and figuratively. The question of your successor is absolutely central to your business succession plan, and will be one of the most important decisions you make in your entire career.

Since it is a personal as well as a legal question, there is no definite formula for choosing a successor. However, we can give you a few pointers based on what we’ve seen over the years.

Common Choices of Successor

When it comes to choosing a successor, there are a few different ways you can go.

First, it’s likely that you are considering a family member. Family businesses are extremely common; the majority of businesses in the United States are family-owned, and not just small businesses, either.

That said, succession within a family raises all sorts of complicated questions. There tends to be a level of emotional investment in a family business that might not be present otherwise, and while this can make bonds of love and trust stronger, it can make conflicts bitterer and more personal. In these cases, crafting an airtight business succession plan is more important than ever.

Passing the business to a family member also raises the question of who will succeed you. If you have multiple children, there will likely be some degree of competition between them as to which one gets to inherit the business. It may be tempting to allow multiple heirs to succeed you, but unless you can work out a strict separation of powers between the two (or more) heirs, this will frequently lead to more conflict in the long run.

Aside from a family member, you have a number of other options. If you work with one or more business partners, then your best bet may be to transfer your interest in the business to your partners, in exchange for compensation. If you have no business partners and do not want to transfer it to a family member, then you must find another party who you trust, either an employee of the business or an outside party.

Factors to Consider

Whoever you choose to succeed you, it is crucially important that you carefully consider all of their strengths and weaknesses before making up your mind. You should ask yourself whether they have the willingness to succeed you as well as the intelligence, drive, integrity, and problem-solving acumen to do so effectively.

All of these traits may sound fairly self-explanatory, but the devil is in the details. Much of the time, the traits you are looking for will be manifested in small and intangible things which cannot be easily checked off of a checklist. The parts do not necessarily add up to the whole.

Keep in mind that some potential successors, well aware of the fact that you are considering them, will do everything they can to fool you into thinking that they are the right choice. Once they take the reins of the business, however, it may be a different story.

Keep in mind, also, that even when a successor has a good heart, many people who come into wealth suddenly (like lottery winners) have a tendency to spend it carelessly. While it may be impossible to prevent this phenomenon entirely, a wise business succession planner will take it into consideration.

In short, there’s a lot to take into consideration and you should never, ever make this decision without a full evaluation of all the facts at your disposal.

The Valuation of the Business

One of the most important steps in the business succession process involves getting a valuation of what your business is worth.

In some cases, valuation will be straightforward: if you own publicly traded stocks in a company, then it will be easy to calculate your share of the business work based on the stocks’ market value.

Other times, your valuation will be less straightforward.

It may be possible for you to arrange an informal valuation with your business partners, but it is also important to ensure that you do not get lowballed. There are a lot of factors to be taken into account in a valuation, all of which will have an impact on the final dollar value, and you may not be qualified to do this on your own.

Therefore, in order to obtain a proper valuation, you should hire a certified public accountant who specialized in appraising businesses. You should also, in most cases, hire a business succession planning attorney.

Taking All Stakeholders into Account

You own your share of the business, and what you choose to do with it is entirely your decision. However, a good succession plan takes a wide variety of parties into account, not just you and your successor.

If you are in a partnership, it is important to work with your partners (or, if you are own a corporation, your fellow shareholders) to ensure that the transition is as harmonious as possible and that they are able to work with your choice of successor.

Furthermore, with every business succession you must consider the impact it will have on your customers and employees. Everybody likes consistency and dependability, and your customers and employees will want some sort of assurance that their lives will not change too dramatically once you are gone and the new ownership takes over.

Even if you don’t do exactly what these parties want, it is important to hear all their voices, seriously consider their input, communicate clearly throughout the process, and give them the feeling that their concerns are valued.

During this process, a little bit of respect can go a long way. You do not want a mass exodus of customers or employees because they are frightened and uncertain about the future of your business.

The Business Succession Agreement

In almost all cases, your business succession plan will involve some sort of agreement between yourself and your successor(s). This agreement will need to be enshrined within a written contract. An informal or spoken agreement isn’t enough, no matter how much you may trust the people involved!

Business succession agreements can deal with a wide variety of factors, including who the successor will be, how much the business will be sold for, and the circumstances by which this may occur.

The type of contract you need will vary depending on your circumstances and on whom you intend to pass the business to. In many cases, particularly if you are transferring the business to a partner, you will likely need to draft a buy-sell agreement.

Buy-sell agreements typically involve life insurance policies. There are a couple of ways that this can be done:

  • In a cross-purchase plan, each partner in the business is the beneficiary of a life insurance policy taken out on every other partner. When one partner dies, the others use the proceeds of the policy to buy that partner’s share of the business.
  • In an entity purchase plan, the business itself takes out a life insurance policy on its members and obtains the partner’s share in the business after their death. This typically works best for larger businesses with several partners, where it is impractical for each one to have a life insurance policy on the others.
  • In a one-way plan, you can arrange to sell the business to someone other than a partner. In this case, the plan will only take effect after your death, and not that of the designated successor.

Buy-sell agreements are not the only type of business succession agreement you can make; there are other types of contracts that can be drafted to deal with different succession arrangements. And business succession agreements can deal with circumstances such as retirement or disability as well as death.

In any case, the creation of a contract is not something to be taken lightly. While you may be able to draft a crude contract with a template you find online or in a book, this is not good enough. Business succession contracts need to be made as strong as possible, and this is a task to do with both hands.

To this end, you should seek the services of a skilled business succession planning attorney. Hiring an attorney to help you with the contract is not as costly as you may think, and the cost will likely be dwarfed by the amount of time, money, and stress you will save yourself, your successor(s), and all other parties involved.

Furthermore, business succession is not something that can be done once and forgotten about. As with other elements of retirement and estate planning, such as creating a will or trust, it will necessarily change in accordance with the circumstances in your life. You will need to update it over the years and decades, and this will require continuous effort on your part. That is why it important to have not only skilled but consistent legal advice.

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