If you own a small business, developing your succession plan is a critical element of business planning. Many business owners fail to appreciate the complexities and time involved in successfully transitioning a business. Entangled in the day-to-day management of their companies, they neglect this essential element of business planning to their detriment.
Transitions in business are prompted by retirement, sudden illness, incapacity, death, or other major life events. Failure to plan for the inevitable transitions of life puts a business’s survival at risk. For example, death or disability could disrupt your company’s key systems if other individuals lack the knowledge and experience to lead the company in the absence of its original owners and managers. Additionally, as those in leadership age, they must consider whether they have funded their retirement accounts sufficiently to sustain them when they stop working. A business succession plan addresses these issues by identifying and implementing the strategies necessary to successfully transfer leadership from one group to another. By carefully crafting your business succession plan, you can facilitate the proper preparation needed for a smooth transition in the company.
To develop a sound plan, you must consider your desired exit strategy. There are several options available. Some business owners decide to keep ownership and management within the family. This option is often selected when one desires to nurture specific family values over time. If this situation arises, a transitioning owner should explicitly document and teach these values. Additionally, current leadership should diligently assess which family members have the ability and interest to lead the company. It should be noted that successor decisions can affect internal family dynamics; the choice to transition in this way should not be made without careful deliberation.
In other instances, business owners may choose to pass leadership to a key employee who fully grasps the nature of the business. When a company’s leadership opts for this transition strategy, it is important to determine the additional training and development the successor employee may need to usher the company into its next stage. Another important consideration is ensuring that the employee has the financial ability to purchase the business. As the current owner, you may have to assist the employee in securing the financing necessary to buy the business.
Another strategy is to sell the business to a third party. An objective external party may be able to make better decisions regarding the future of the business due to their unbiased point of view. Challenges may arise between the successor and older employees who are not acclimated to the new leadership style, however. This tension could result in high turnover during the transition period, but with proper preparation and support, the new leadership and older staff can adapt successfully.
Finally, business owners can choose to pursue a hybrid option where management is turned over to a key employee while the family retains full or partial ownership. This strategy allows the family to maintain financial rights as well as top-level decision-making power, while simultaneously preserving the most qualified candidates to manage the business.
Each of these options presents its own benefits and challenges and must be chosen well in advance. Early analysis of these various options will allow owners the time needed to prepare their successors.
There are a few other matters that must be considered when preparing a business succession plan.
Once a business’s leadership has determined its exit strategy, the legal, financial, and practical elements of the transition must be set in place. A common legal solution for outlining these elements is the buy-sell agreement. When implementing a buy-sell agreement, significant attention should be given to the triggering events and legal mechanisms set forth pertaining to the valuation, buying, and selling of business interests. Drafting this document should be coupled with sound tax and insurance counsel.
We Can Help
The best time to begin succession planning is now. Navigating the legal implications of business transitions can be complicated, but we are here to help. Call us at 208-401-9300, or visit our home page, www.genlawgroup.com, and Book An Appointment.