Minding Your Business: Succession Planning for Business OwnersMarch 4, 2020 | Stella Lellos | Wendy Hoey Sheinberg | |
Business owners are driven, focused, goal-oriented people, who have achieved success by keeping their eyes on the ball at all times. Running a successful business, however, goes beyond running a business day to day. It means having the ability to grow in strong markets, reacting to industry downturn, and most importantly, planning for unforeseen events, including planning for the smooth operation of the business if the business owner is unable to operate the business.
What happens to your business if you retire, become disabled or pass away unexpectedly? Can your business run without you? How will your employees be impacted? Careful and smart succession planning ensures that your business can operate in your absence.
The following are elements of a good succession plan.
Establishing a Successor
At a minimum, a succession plan should address emergency decision-making. A business owner must have a plan that meaningfully provides a simple and orderly way for information to be obtained and for action to be taken.
Basically, a business must have an emergency autopilot that can be activated quickly without much fanfare. Imagine being on an airplane where the flight attendant needed to remember that the instructions for activating the autopilot were located in the lock box hidden behind the encyclopedia and that the key was in the top sock drawer. By the time the instructions are located, nature and physics will have taken over, and you will have no ability to control the path of the aircraft.
Identifying and training a successor increases the likelihood your business will thrive in your absence. Formalizing the terms of succession can help you to retain valuable employees and reduce squabbles when family members disagree on management roles.
Succession planning also involves questions of ownership. Who will own your interest in the business when you are gone or incapacitated? Will leaving your business to one family member create financial inequality among your beneficiaries and is there a way to balance that out? A proper succession plan includes proper estate planning. A comprehensive estate plan will address questions of financial inequality and include preventative measures to avoid the issues that can destroy family businesses.
Growing businesses often overlook formalities beyond the question of whether to incorporate as a corporation, an LLC or a partnership. Addressing management agreements, business succession, buy-sell agreements and non-compete agreements during calm and productive times can avoid the personal and financial hardship that comes when trying to sort out details in times of stress.
Periodically reviewing business agreements is essential. Do the owners have a current, signed buy-sell agreement? What are the events that would trigger a purchase by the other owners of the shares or interests of a deceased or disabled shareholder or partner? Does the buy-sell agreement provide for life insurance for the owners? If so, is the ownership of the insurance policy correct? Who are the beneficiaries? Failure to have the right insurance, or having incomplete or out-of-date valuation provisions can be the beginning of litigation among shareholders with divergent views, and ultimately the end of a business.
Comprehensive Power of Attorney
A business owner should consider a Power of Attorney (POA) that designates a person (“Agent”) and successors to make decisions about the business in the event the owner is unable to do so. Ideally the POA should outline the activating conditions and the scope of authority the Agent is able to exercise. While POAs are sometimes executed in connection with business loans, a comprehensive POA would be beneficial in addressing matters beyond loan transactions and would allow the Agent to achieve the objectives of a succession plan.
It is truly a feeling of great personal satisfaction and pride to stand back, look at your business and say, “I built this.” Knowing you built something enduring is even better. Your estate planning and corporate attorneys can help you evaluate your succession plan to maintain not only your business but also your legacy.
- Stella Lellos
- Wendy Hoey Sheinberg