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Key Considerations for Business Succession Planning

Posted: December 18, 2017

For most business owners, the largest, most important asset they own is their business.  It is where they devote the most time and expend the most energy.  It is what supports them and their families.  But it is also their creation-something they have built and nurtured over the years.

If you are a business owner, it may be hard to think of your business in the hands of someone else.  But no doubt you are also deeply concerned that your business can still support your family should something happen to you.  If you die or are injured or incapacitated, someone will have to step in and operate the business, and perhaps even sell it.  However, you will not be around to guide that person, make decisions or determine whether a sale is warranted.

“Business succession planning” is the process of addressing these concerns and preparing now before the unexpected or the inevitable occurs.

Most of our business clients are part of a small closely held ownership group or even sole owners.  Some have spouses and children actively involved in the business.   Others have families that are completely uninvolved in the business.  Every situation has its own set of challenges, but here are some common concerns:

–         Consider your personal situation. What are your income needs now, and what will they be in retirement?  Will you have sufficient resources set aside or will you need an income stream from the business?  How long do you want to stay active in the business?  Will you need to sell the business to realize your goals in retirement?

–         Are your family members able to operate the business when you no longer can?  A realistic appraisal of the talents, work ethic and career interests of your spouse and children is essential.   All too often family members have different attitudes toward the business or are just “not on the same page.”  Dividing a business equally among your children may seem easy, but it also may not be the best approach.  One child may be currently active in the business and want to continue in the future.  Another may have other career goals and prefer just an income stream from the business or even to be cashed out.  Still another may wish to become active but be the last person in the world the business needs involved. If not properly evaluated and managed, the mix of different viewpoints, desires and abilities can risk terrible family stress and resentment, not to mention adversely impacting the business itself.

–         Who are your key non-family employees?  Can one of them step up and operate the business after you are gone?  How will key employees react to working with or for your family members?  Maybe it is wise to plan for a sale to a key employee, immediately over time.

–         Does it make sense to plan to sell the business to a third party?  If neither family nor a key employee can operate the business, then a planned sale may be the solution.  Planning for a sale prior to your actual retirement can allow for an orderly transition and maximization of value.  Who better to present the business to potential buyers than the person who created it?

–         If you are one of several shareholders, a buy-sell agreement is always advisable.  The agreement can provide the method and timing of a buy-out based upon a triggering event – retirement, inability to work, death, etc.–  and for insurance or other funding mechanisms.

–         Planning for succession in your business is technically different from estate planning.  However, since your business succession plan deals with your most significant asset, it will definitely impact your estate plan, especially when selecting different assets for different beneficiaries.  It is important that your business succession plan be considered a part of your estate planning.

Failure to plan can result in loss of income or loss of value, and can cause serious friction and strife among family members.  The process of planning for business succession can seem daunting, but consider how much more difficult for your family to go through the process without a plan and without your guidance.  We are experienced in business succession planning and can help you work through these concerns to come up with the best plan for you.

These materials have been prepared by Haskin Law for informational and educational purposes only and do not constitute legal advice. This information is not intended to create, and receipt of it does not create, an attorney-client relationship.

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