Business succession planning requires the attorney working with you to have a thorough understanding of your business. A business succession plan is actually a collection of several different plans and documents.
Your business succession plan will include:
- Estate planning documents
- Plan for how to train and prepare the next generation of leaders for your business
- Plan for transferring legal ownership of the business
- Plan for funding the transfer of ownership
- Details of any securities issues
- Changes to corporate structure as needed
You and your attorney will discuss what you want to happen to your business in the event of your death as well as what your exit strategy is from your business. Once your goals are clear, you and your attorney will work to make any changes to the business organization that are needed to facilitate your plans. Your business succession planning attorney will also create the legal documents needed to facilitate the changes.
You will also likely need to work closely with insurance agents and accounts to make sure your business succession plan is ready to be implemented.
Buy Sell Agreements
One of the keys to your business succession plan will be a buy-sell agreement. This is a contract between you and another person or persons that upon certain triggering events, you agree to sell them your business and they agree to buy the business. The triggering event for the buy-sell agreement could be anything from your death to your desire to sell the business.
You can have buy-sell agreements with a family member, or anyone else. But, you will want to make sure that you are selling the business to someone who is capable of managing the business or has plans to hire someone capable to run the business.
If you properly structure your estate plan and your buy-sell agreement, you can keep your business from falling into probate. This will give your business the stability it needs to thrive, even after you are no longer involved in it.
Buy-sell agreements can be used to help stave off power struggles for control of your business.
Funding Buy Sell Agreements
Most people do not have access to the kind of funds they will need to buy your business. You will need to find a mechanism to find the buy-sell agreement. The most common way to fund these agreements is with life insurance.
You will have a life insurance policy that names the person who will buy your business as the beneficiary. Upon your death they take the money from the life insurance policy and buy the business from your estate. This way your family gets the money from the business that you have works so hard to build and the business lives on under the control of your chosen successor.
However, life insurance is not the only way to fund a buy-sell agreement. Obviously, life insurance will not provide you with an exit strategy if you choose to retire. Other ways to fund a buy-sell agreement include opening a special account where the future buyer makes regular payments to over the years. Once you decide to leave you cash out this account. The buyer will continue making payments until the agreed upon price has been fully paid. This gives you a reliable cash flow from your business, even after you leave.
If your business has shareholders you will need to make sure that your business succession planning takes securities laws into account. Any sale or transfer of stocks will need to comply with state and federal securities law.
You will also want to make sure that you have set up the stock issuance in such a way that the other shareholders will not be able to out vote your chosen successor or succession plan.
Designating a Successor
If you want to make sure your business continues to thrive for decades after you leave, you need to make sure that you not only designate someone to run the company after you, but that you choose someone who is prepared and competent enough to help your business continue to succeed.
One of the most common mistakes business owners make is to put their children or grandchildren in charge of the business when they are not ready or not interested in the business.
There is nothing wrong with passing your business on to your family. However, you need to take steps to make sure they are full prepared to run the business.
You and your attorney may want to talk about the best ways to prepare your successor and if you want to divide ownership and management of the business.