INHERITANCE LAW
BUSINESS SUCCESSION PLAN
Reap the Fruit of Your Labor! Plan Now. Who Shall Take over Your Business?
What happens to your business, your life’s work, when you die unexpectedly or retire? Should it be liquidated, transferred within the family, or sold to a third party? If you own a percentage of the business, will a business partner acquire your stake? If so, what will be your estate’s remuneration? Is there a contractual understanding between you and your business partners of the business’s value or valuation methodology? If the business is large and illiquid, how will the buyout be financed? And over what timeframe?
Or, if you want the business to stay in the family, how will one successor finance the family-buy-out? Examples abound of family businesses being sold, broken up or dissolved because the founder did not adequately anticipate the family dynamics.
Valuing businesses is often a contentious issue, whether in a divorce, estate division or succession planning. How is the value of a corporation determined, especially the valuation of a personal sole propriertorship?
Business succession is an emotional subject. Many consider it morbid. It needn’t be. You should begin thinking about succession challenges the moment your enterprise becomes profitable, perhaps sooner. It can take years to get everything in place and avoid pitfalls. I can help you craft a viable, value-enhancing exit strategy – to enjoy your golden years with your family, or to impart maximum value to your estate in the event you die unexpectedly.
How Do You Get Started with a Business Succession Plan?
Accept that you or your key employees may be out of work tomorrow and unable to show up for work. Who will replace you and them?
Key Employees
Identify your key employees. Not just the rainmakers and decisionmakers, but the stewards of important operational and administrative knowhow – in payroll, accounting, compliance, IT, procurement, marketing, sales, inventory, hiring, fulfillment, distribution and online media. Every department has company-specific knowledge; ways of doing things that outsiders cannot master overnight. In many instances, there are years of undocumented company-specific knowledge. Knowledge that will be lost once an employee leaves or retires.
Share Knowledge
Begin succession (and continuity) planning with the keepers of company-specific operational and administrative knowhow. How can you ensure that the sudden, unanticipated loss of such an employee (or group of employees) will not disrupt your business? Does every such employee have a “stand-in” or junior employee who is learning the ropes? Do they have a confidentiality agreement? A noncompete? Has the knowledge-holder documented key functions and procedures on paper or in a tutorial? Does he or she conduct regular formal and/or informal training with others? And are there drills to see whether others can fill in temporarily or even permanently?
At the executive level, identify who you want to manage your business when your continued involvement becomes untenable. Begin grooming your successor now, so he or she is suitably equipped when need arises. If you are like most entrepreneurs, you acquired your acumen through decades of real-life, hard-knocks experience. Spare your successor(s) and your estate those hard knocks. Steepen the learning curve by identifying your top-level management successors and grooming them today.
Sale as Exit Strategy
If your exit strategy involves sale, begin conceptualizing it today. What range of value should your estate expect? Under what conditions? Who are the most promising potential buyers? Have you shared their contact information with your family and executor? Would certain employees be crucial to the sale? How have you induced them to stay on board? Do the most attractive buyers have the liquidity and wherewithal to finance a sudden purchase? Would the estate be willing to offer seller financing (installment payments, a secured loan) to facilitate a sale?
Work out a Plan, Scrutinize It and finally, Put It into Action
A well-documented succession plan will help you preserve your business for the next generation or, if exit is preferred, maximize its value upon disposition. A lawyer should assist you with the succession plan’s formulation and, more important, its implementation.
Thinking about death or even retirement is hard. It is so much easier to focus on the here and now, on your next big transaction. Unfortunately, we age. Every business leader elects or is forced to step back at some point. The seeds you sow now for making your business succession smooth will ensure that your heirs’ harvest is bountiful. I am a business owner myself, I understand the importance and challenge of effective succession planning. Let’s brainstorm. I am confident we can make the process easier.