Do You Need a Succession Plan for Your Business?

Dec 2014 | Business

Ask yourself the following questions:

  • What will you do with your business when you lose your desire or ability to work?
  • How will you realize the value of your business?
  • Who do you want to succeed you?
  • How will you prepare your business for a transition in ownership or control?
  • Where will you turn for assistance for successful succession planning?

These questions are addressed in a business’s succession plan. A business should have a succession plan if the owner would like to maximize the value of the business for retirement, reward an employee, partner or family member, or leave a legacy.

A succession plan should be prepared with the assistance of your attorney and certified public accountant or tax consultant, and possibly an investment advisor and insurance representative. It may include the continuation of your existing business or the sale of its assets. However, the initial and perhaps most important step is to determine the parties who will succeed you. You will need to balance return on your investment with impact on relationships. Will you risk the alienation of family and friends to get the best return? Will you sacrifice the best return to reward a trusted partner or employee or to help a family member get started? Will your generosity to someone really be in their best interests? If you are concerned about the legacy of your business, you may forego an individual interested in succeeding you if you believe that they don’t have what it takes to replace you—it may be better to sell the business to an outsider and leave some of the money to a family member than to give the business to a family member who isn’t interested in or capable of running the business.

A succession plan may include any variety of transfers of interest to achieve your goals. You may work towards selling everything at once or gradually reducing your control through sales or gifts of smaller interests. You may want to retain enough interest to control major decisions like the sale of substantial assets or provide incentives for hard work through discounted stock purchases over time that eventually transfer control from you while still retaining a minority interest. Your plan may want to include safeguards to protect you once you start relinquishing control (e.g. employment or consulting agreements, special voting rights for issues of importance to you).

The succession plan must be in writing signed by the intended parties. This is usually done through a shareholder agreement for a corporation, an operating agreement for a limited liability company, or a partnership agreement for a partnership. Even an employment agreement may be used to provide terms of a succession plan intended to eventually lead to the employee becoming an owner. An ownership agreement should include comprehensive buy-sell provisions to protect the intent of the parties from being sidetracked by undesired events such as death, disability, divorce, bankruptcy or termination of employment.

If you have questions about succession plans and business strategies, contact Greg Haffner or John Casey at Curran Law Firm, P.S.—Experienced, dedicated, and responsive legal representation located in South King County.