What Is a Business Succession Plan And Should I Have One?

What Is a Business Succession Plan And Should I Have One?

“What is a business succession plan and should I have one?” This is a pretty common question these days, or at least it’s an issue that comes up when people come in to see me. A lot of people are in the baby boomer generation and they have either small or family-owned businesses, even local here in Southern California where they built their business. 

What will happen to the business?

It has done well, anywhere from a million a year to 100 million a year. The owners are just a family or a small number of people. And people wonder, “I’m working on my estate plan and I’m getting my will or my trust put together.” And they ask, “Well, what about the business? What’s going to happen with the business when I die, become incapacitated, or want to retire?” 

 

A business succession plan

These are things that need to be planned for in advance and the most common way to do this is by creating what’s called a business succession plan. It’s just like estate planning where you ask, “Who do I want my business to go to? Who is going to own it after I die or can no longer take care of it? Who’s going to manage it?” 

This can even be an issue in a divorce. For example, there may be two partners and they’re worried, if one partner dies, they don’t want their spouse taking over and having to be a partner with this other spouse or the other partner’s son who doesn’t really care about the business. 

Also, a lot of people who own family businesses say their kids want nothing to do with the business. They have no interest. So, they want a way to transition the business to somebody else because if it makes money and is profitable, there’s no reason for them to just let it go if they’re no longer able to run the business. 

A plan to transition the business

So, there are ways that we can take a business and strategically plan to transition it. Maybe it’s to some of the employees, maybe it’s to prepare it for a potential sale to an outside party, or even just to put things in place to transition it to the children if there are some that want to take over the business. 

We put all these things in writing and also plan for any issues that could come up in the meantime. After all, we never know exactly when we’re going to die or whether something is going to happen where we can no longer make any decisions for ourselves. And a family-owned business is very personal. It’s like someone’s baby. They want complete control. They want to know what’s going to happen in the future. 

And so, a business succession plan is an integral part of owning a business. Unless you’re planning on selling the business within a few years and you’re just keeping it for a couple more years, you should have a written business succession plan. 

What should a succession plan cover?

The succession plan should cover things like the following: “What if there’s a partner or a part owner who dies or gets divorced? What about the spouse? Do we want them involved? What about their kids? Who’s going to take over? Who’s going to run things?” 

A buy/sell agreement

One of the most common things is what’s called a buy/sell agreement. We put a buy/sell agreement or a shareholders’ agreement in place that covers some of these issues: death, incapacity, divorce, even things like bankruptcy of one of the owners. 

We try to cover these issues to transition the business or to determine how we are going to sell somebody’s 50% ownership interest if they want to sell it to an outside party. Do we want the right to say, “No, I don’t want that person’s buddy to buy in and have to become a 50% partner with them”? 

What you should do

We put those things in place because otherwise, a 50% shareholder of a corporation might be able to sell their 50 percent to their buddy or somebody else, get a bunch of quick money, and then you would be stuck with somebody that you don’t want as a 50% owner of the business. 

So it’s good to put something in writing, whether it’s a buy/sell agreement, a shareholders’ agreement, or a business succession plan. There are a number of different things that we can use to prepare for all those potential things that can happen in life.

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