Why do I need a Succession Plan for my Business?

Today’s topic that we’re going to discuss is succession planning for companies. Succession planning ensures that as the ownership of the company either wants to retire, or perhaps sell the business, that key employees or other personnel are in place to ensure that the company will thrive moving forward without that owner or other key person. 

There are a number of ways to effectuate succession plans. Important things to consider in succession planning is to gather all the information that’s critical and necessary for the operation of the business. That would include the software passwords, key records, accounts and contracts. Make sure that they’re all gathered in a central place where management can review them and know that they’re there. 

Succession Plan Tools

Sometimes we’ll use Buy Sell agreements for shareholders to determine what will happen in the event of perhaps a shareholder’s death, or if they want to sell the company. And we also use estate planning tools like wills and trusts to help effectuate a succession plan as well. It’s critically important in performing your succession plan to update all corporate records, meeting minutes and resolutions so that any prospective purchaser or anyone taking over the business will have all the critical information they need from a corporate resolution standpoint to move the company forward. 

Start Succession Planning Early

Often we talk about succession plans in terms of who is going to take over the business for that individual that runs the company. And it is important to know who that person is going to be, whether it’s a family member or a key employee that can come in and learn the business. We recommend starting succession planning approximately five years or more from that time when someone is seeking to retire or sell the business. The interest in the business changes over time and it’s important to know who the key employees are other than the owners, family members, or even outside buyers. You want to spend time determining who that person or group of people will be in an exit succession plan. In other words, when the owner is looking to get out of the business and sell their interest. Oftentimes, small businesses are entirely valued on the principle or owner of the business based upon that person’s work and efforts in performing their work in the business. 

Tools for Succession Planning

So to set it up so that that interest in the company can be purchased, there are a multitude of tools that we can use to do that, all of which require that the company be valued. It’s a critical step in the process to determine the value of the company. Oftentimes, we’ll set up Buy-Sell agreements, providing for the sale of the owner shares of the business, which could be triggered by retirement, unresolved conflicts with other owners, death, divorce or disability. These Buy Sell agreements mandate the terms of what would happen in those events. Often there are cross-purchase plans that are available for other shareholders to buy out the other owner’s interest in the business and that’s a document in advance that outlines the general terms and conditions of the stock buyout. There’s also the company redemption plan, where the company would essentially buy the shareholder’s shares over time, thereby allowing the shareholder to be bought out. 

Funding for Succession Planning

There’s also a hybrid type of exit plan that if the owner was to pass away or is disabled, the company would have the right to buy the owner’s interest, followed by the other shareholders. And if the shareholders do not purchase the company, lets them purchase the shares. Funding is always an issue in any type of company purchase, whether it’s cash, life insurance, disability insurance, an acquisition loan, seller financing, or some installment sale. These issues need to be addressed upfront to make sure that funding of any exit plan is properly handled.

In the event of a death or accident of the main shareholder of the company, we advise setting up an estate plan that consists of a living trust and a will. And potentially even setting up limited liability companies to break apart liability aspects of the business, so that when the purchaser becomes present and wants to buy the business, the seller will have an estate plan in place to ensure that the proceeds of any sale are passed on to the beneficiaries. 

Hopefully, the key personnel is in place and the succession plan will move forward smoothly and the company will continue maximizing its value for the shareholders and for the retiring shareholder as may be.