Business succession planning is essential for every business owner, but something many fail to consider. The reasons for this vary—busy running the business, unwilling to confront mortality or vulnerability, bad advice from advisors or professionals, or the lack of knowledge regarding business succession planning. Whatever the reason, the failure to develop and implement a business succession plan can have a significant adverse impact on the business, business stakeholders and the family of a business owner.
Business succession planning is the process of determining how management and ownership of a business will transition upon the occurrence of certain triggering events. Hopefully, the triggering event is voluntary retirement, but voluntary retirement is just one of many triggering events. Other common triggering events include divorce, disability, death, and bankruptcy or insolvency.
Regardless of the triggering event, the focus of a business succession plan is who will succeed to the management and ownership of the business. Generally, the “who” will be one or more of the following:
Employees: Employees are a common option because business owners are familiar with them and able to evaluate their suitability to own and manage the business. Furthermore, the prospect of ownership and management can provide a significant incentive for employees. The major negative is that employees may not have the financial means to purchase the ownership interest. However, numerous options exist to transfer ownership to employees that account for such financial limitations, such as employee stock ownership plans (ESOPs).
Co-Owners: For businesses with multiple owners, co-owners are a logical choice because they are familiar with the business and requirements of ownership and management. However, as with employees, co-owners may not have the financial means to purchase the ownership interest. To account for any financial limitations or multiple co-owners, an alternative would be to have the business itself purchase the ownership interest, which is otherwise known as redemption.
Third Parties: Third parties are an attractive option due to the number of possible persons, from known competitors to unknown persons or entities, and the ability to select the best offer. The primary negative is the lack of familiarity with third parties and their unknown intentions for the business, which could adversely affect the business and its stakeholders.
Family Members: Many business owners may dream to pass their business to family members. However, the decision to do so could cause conflict between and among family members and business stakeholders. Serious consideration must be given to determine whether family members are capable and even desire to take over the business and whether it is in the best interest of the business, its stakeholders and the family.
Finally, simply having a business succession plan is not sufficient—it must be communicated to the relevant parties, incorporated into the governing documents of the business, and consistent with the personal estate planning documents (i.e., will, trust, power of attorneys, etc.) of the business owner. If not, the result could be the same as not having a business succession plan at all.
The attorneys of Plano-based Starr Law Firm, P.C. have over 50 years of combined experience handling complex business, real estate, estate planning and tax matters. They are perfectly poised to offer effective legal solutions for businesses and individuals throughout the Dallas-Fort Worth Metroplex. Connect with an attorney at Starr Law Firm, P.C. here.