Crafting Your Business Succession Plan
Most people are not content simply to walk away from a company they built without having any input about who will follow in their footsteps and how the business will function in the future. If you have partners, you should have a plan to make things go smoothly if one of them suddenly retires, dies, or has to leave the company. A business succession plan can address both of these issues.
Although every company is different and your circumstances are unique, here is a general process that could help. You will want to talk to a Maryland business attorney about your personal goals and your company’s needs. It can help to get legal advice when crafting your business succession plan.
1. Figure Out What You Want
You would not plan a vacation until you decide where you want to go. In the same vein, you will need to nail down what you want for your company and the rest of your life. Think about how much money you will need during the remainder of your life and what you would like to do with your business interests.
Some business owners push themselves hard for decades to afford to retire with enough money to do the things they always wanted to do when they were grinding away. Others want to work until they fall over at their desk or at least until they feel they are no longer at the top of their game.
You might view the business almost like your child, having spent years giving it life and helping it grow. You might want to choose a successor who will continue your mission. Other business owners are so sick of the company they do not want to give it a single thought when they walk out the door. You will need to address the long-term game plan for the business and the day-to-day business operations.
2. Talk to Your Co-Owners
If you have complete ownership of the business, you could skip this step or talk to some of your most valued employees about what they would like to do after you exit the company. You might find one or several of them would like to buy the business.
If you have partners or co-owners, this is the time to be candid about how long everyone wants to stay involved in the company. When all the partners want to retire simultaneously, you might want to put out some feelers to prospective buyers who might want to purchase the business.
3. Set up the New Structure
When you know how long you and everyone else want to stay, you can start thinking about who will replace the various members of management who will be leaving. You will want to determine whether the people you have in mind to take over actually wish to do so. For example, a succession plan that assumes your child will want to take over the family business could end badly if your family member has other plans.
It is usually best to have multiple candidates in mind, particularly for the crucial positions, because life is unpredictable. A sudden accident or health crisis could knock out your first choice. Also, you might have a medical emergency that forces you to accelerate your plans. Death or disability can cause you to leave the helm before you want to do so. You will want to have a business plan to ensure the continuity of your company.
The best practice is to have a Plan A, Plan B, and Plan C to be ready for whatever happens. You should have different strategies for a scenario in which you retire when you currently think you would like to and another plan to put in place if you must exit the company earlier. Set an ideal timeline and an emergency timeline.
You might be lucky enough to have a talented person like a key employee already on board whom you could groom as your replacement. If so, you will want to explore the person’s interest before investing too much time and effort into teaching them the skills they will need to move up in the company.
4. Keep a Record
Write down your plans, including the options you are considering. Document your preferences and which one is your first choice, second choice, and third choice. Explain in writing the reasons for your strategy to provide guidance if there are future disputes.
5. Get Great Advice
It's sad to think about leaving a company you worked so hard to build. You might worry about:
Whether leaving is the right decision
The financial security of your employees after you leave
If you have thought of everything
Whether you are going about this significant move correctly
You will likely have more peace of mind about your decision when you get top-notch advice from professionals in several fields.
Your company and personal accountants can provide tax advice about structuring the small business succession plan or transferring ownership of a larger entity to avoid or at least minimize any tax consequences.
Your business attorney can help you avoid legal entanglements when going through the planning process and implementing the transition.
Your insurance agent can explain how your insurance needs will change when you exit and whether your business insurance coverage includes funds to replace or buy out the interest of a partner or yourself through life insurance or some other policy.
Depending on the size and visibility of your company, you might want to work with a public relations agency on a media plan for the changes to the business. Small businesses, as well as larger companies, should consider this step.
An estate planning lawyer can draft legal documents that can manage your interests during your lifetime if you become disabled or want to go “off-grid” for a while and protect your family after your death.
A business valuation expert can perform an appraisal of the business's value to sell your ownership to a partner, your employees, or an outside interest. This valuation will need you to decide whether you plan to sell company-owned real estate to fund your retirement.
You will want to revisit your partnership and company papers to make sure your plans do not violate any of the terms of those documents. For example, if the partnership agreement gives your partners a right of first refusal for the buyout of your ownership interest, be sure to comply with that requirement and document your actions before offering your shares to someone else. Your papers might include a buy-sell agreement that limits your options.
A Maryland business attorney can help you navigate through planning and implementing your business succession plan. Contact Steve Thienel today for assistance in drafting your business succession plan.
