Business Succession Planning

Like most small business owners, you are probably so consumed with the day-to-day operations of your business that you have not had the time to focus on your exit strategy. The process of planning your orderly exit from your business is called succession planning.

Your succession plan is essentially who will take over running your business and under what circumstances. For example, you may wish to pass the business on to your children, but what if one child decides she doesn't want any part of it? If you do give the equity in the business to the children, will you do it over time or all at once? Do you want to sell your business instead of passing it on? You may decide you want to work until you drop! Each of these potential decisions would require unique planning considerations to execute.

Succession planning for the business owner is a complex process involving financial and estate planning considerations. Key considerations in succession planning include what happens when a key member dies or becomes disabled. Will the business have to be sold to settle the liabilities or the estate? Can the business go on without the key member?

You will want to consider getting your potential successor involved in the business operations several years before you anticipate her taking over. You may want to give up management control but retain a substantial equity interest in the business. It is also advisable to have a temporary succession plan, in case you have to take substantial time off because of illness (or you want to travel around the world!) Finally, if there are multiple family members involved in the business, each one will need an individual plan.

Another critical aspect of succession planning is the buy-sell agreement. For businesses with multiple owners, you may be faced with the unexpected need to buy out another owner, either because of death, illness, retirement, or simply their desire to do something else. Buy-sell decisions can also be triggered by an offer from a third party to buy the business, divorce, bankruptcy or the loss of an owner's necessary professional license.

A typical buy-sell agreement may provide that if you die while actively involved in the business, the remaining owners must buy your interest from your estate at a predetermined sales price or formula. The agreement may also provide a right of first refusal if you retire or want to sell out to an outsider.

These are just a few of the issues you will need to work out with your family and your advisors. It is important that you, as a business owner, have confidence that your legal, financial and investment advisors have the knowledge of your business and the professional skills to work with you as a team and to help you develop and implement your succession plan.