Many people understand the importance of creating a clear, comprehensive estate plan for their personal life. Ideally, you’ve already taken steps to prepare your Last Will and Testament, Financial Power of Attorney, Healthcare Power of Attorney, and any living trusts you wish to fund for your beneficiaries. Have you applied the same thoughtfulness and thoroughness to the administration of your other “estate” – your business? Just as individuals need to get their personal affairs in order, so must business owners establish a clear, workable succession plan. Consider it an estate plan for your business because essentially that’s what it is.
Fundamentals of a Business Succession Plan
A business succession plan can settle important questions such as: who gets the first offer to purchase the business and who will be in charge if the family is unable or unwilling to take control. The succession plan can also clarify which specific family member or members will have first refusal on business succession, a point that might otherwise lead to some nasty infighting among your surviving loved ones. These decisions can have a critical impact on the future prosperity and longevity of the business and other owners/partners of the company.
Just as many people put off personal estate planning because they feel too young and/or healthy to worry about the issue, business owners often get so caught up in the everyday work of running their business that they fail to devote sufficient thought to their future retirement, not to mention the possibility of their death or disability. However, you need to make the necessary arrangements now, while you can make those decisions clearly and carefully, not in the face of an impending (and disruptive) life transition.
A business succession plan should address several key points, starting with your choice of successor. If no one in your immediate family wishes to succeed you as an owner, or if you don’t feel any of your family members possess the necessary qualities to do an excellent job of succeeding you, you can name a competent friend or professional colleague. However, if you don’t name anyone at all, your business’s ownership interests may simply pass on to your next of kin (for better or for worse).
If you co-own the business, the succession instructions should be clearly set forth in your partnership agreement, membership agreement, or corporate By-Laws. These agreements should include such provisions as a termination clause in the event of a partner leaving the company, a dispute resolution clause to settle disagreements among surviving partners, and any internal succession procedures you wish to establish.
You should also probably purchase a life insurance policy for your successors. This policy, which goes into effect once you’ve departed the company and an appraiser has valued the business, awards a death benefit which can then be distributed among the surviving partners. This arrangement is called an entity-purchase agreement. If you co-own the business with multiple partners, you should have a cross-purchase agreement in place. In this arrangement, each partner takes out a life insurance policy on each of the other partners, with the face value of each policy paid to the survivors as a death benefit.
Creation of a Business Continuity Plan
In addition to a business succession plan, you should also create a business continuity plan. This plan may include instructions on who should fill a variety of everyday key roles, how to manage the loss of one or more business locations, and disaster plans for coping with critical data loss and other potential business killers.
A skilled business attorney can help you prepare and implement these instruments and provisions so you can rest easier about the future of the business you’ve worked so hard to build.
© 2022 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved
This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.