What is “Succession Planning”?

When people ask me what type of law I practice, I tell them that we handle mostly business law, estate planning, and probate.  Because “business law” is so broad, I will often extrapolate on that and talk about how we assist entrepreneurs with everything from the start of the business to the end of the business and everything in between.  That includes entity selection and formation, corporate document drafting and review, contracts, intellectual property, and succession planning.  I was at my daughter’s friend’s birthday party and explained this to the hostess.  When I said “succession planning”, she said, “Oh, so you help businesses be successful?”  My initial reaction was to say no, that is not what that means.  But, actually, it kind of does mean that in a way.  It really got me thinking that a lot of people may not know what succession planning means.

 

The ideal time for us to meet entrepreneurs is at the inception of the business.  We can help them determine which entity structure is best for them from an operating, liability and tax perspective, and ensure they have the proper company documents in place, such as Articles, By-Laws or an Operating Agreement, Consent Resolutions, ownership interest certificates, etc.  We will research the proposed name for the business to ensure that it is not infringing on another business’s name or intellectual property.  Oftentimes, I will ask the entrepreneur what their goal is for the business and what will happen to the business if the principal becomes disabled or passes away, or what will happen when it is time for the principal to retire.  People are frequently taken aback by this line of questioning.  Why do we need to talk about the end of the business that is just getting started? 

 

It’s a fair question.  This discussion is important for several reasons.  Bad things happen and when a business relies solely on one person, the business can be destroyed quickly if something happens to that one person.  Is there someone that can step in and run the business?  The answer to this question is extremely important to the business owner(s), the business owner’s family members, employees, and perhaps most pressing, to the customers or clients of the business.  Additionally, we see too often a business owner in their seventies that is ready to retire but has no qualified retirement plan in place.  Most of the time, when this situation occurs, the business owner views their business as their retirement plan, but has no way to cash out of the business to sustain their lifestyle.  This can be catastrophic.  The business could be worth very little to an outside purchaser, or, even worse, there may be no one that wants to purchase the business.  As such, it is imperative that the business owner have a plan in place well before he or she is ready to retire.  This includes setting aside money for retirement and also having a business succession plan in place.

 

So, what is a succession plan?  A succession plan is just that – a plan for the future of the business beyond the career of the initial owner(s).  That means, it takes time to develop it and it needs to be in place prior to when it is needed.  It is a plan to address what will happen in the case of certain events.  If the principal becomes disabled or dies, there needs to be a plan in place for what will happen to the business.  There either needs to be someone who can run the business indefinitely unless and until the principal can return (in the case of disability), or there needs to be a plan to either sell the business or wind up the business and close down.  A succession plan needs to be developed to ensure continuity of the business if the principal is no longer in the picture due to disability, death, or retirement.  It is important to plan ahead so that the transition can be as seamless as possible.  Often, the plan includes family members who are involved in the business or trusted key employees that are well-versed in running the business.  This will make everything easier on the business owner, their family, the employees, and the customers or clients of the business.

 

Another key step in creating the succession plan is ensuring that the initial owner(s) can be sufficiently compensated for their ownership interest when the plan is put in to action. In the case of a sale to other existing owner(s) or to key employees of the business, if the sale is pre-planned, significant cost and tax savings can also be achieved. To accomplish this requires weighing and considering complex legal, financial, and tax factors surrounding the plan. Creating a team consisting of an experienced business attorney and business financial planner is the best way to ensure that all of these factors are accounted for so that the proper framework is put in to motion in enough time before the plan must be executed.

 

The hostess at the child’s birthday party wasn’t wrong.  Succession planning is helping to make a business successful - whether that be the retirement of the principal, a partial change in ownership, winding up the affairs of the business and closing down, passing the business to family members and/or key employees, or selling the business to a third party.  It is never too early to have a plan in place.