Thousands of small business owners invest their time and energy building a successful company. Very few, however, spend any time developing a strategy that will keep the company operating beyond the life of the owner. Most owners push that task well into the future, believing that it’s not needed until they reach retirement age. Unfortunately, unplanned exits from the company happen far too often, due to workplace or other accidents, disability and untimely death.
You owe it to your family, employees, customers and yourself to put a plan in place that will ensure a smooth transition of ownership. This is especially important for family-owned businesses. In almost all circumstances, a business succession lawyer can play an important role in guiding you through the process.
What are the most common methods of transferring business ownership?
- To a Co-owner. Selling your ownership interests to a co-owner.
- To an Heir. Passing ownership to a member of your family.
- To an Employee. Selling the company to a key employee.
- To an Outside Party. Selling to a person/group unaffiliated with the company.
- To Your Company. For a company with multiple owners, you could sell your ownership interests to the company, which then distributes them to the other owners.
What key issues are most often addressed in a business succession plan?
- Valuation of the company, including the method used to determine its worth.
- Identifying a potential successor.
- A succession timeline, containing details and dates (if a planned succession takes place).
- Formal standard operating procedures (SOPs), including documents, employee handbooks, procedures, etc.
- Funding the succession, whether through life insurance, a seller’s bank note, or other funding options.
- Treating family right. For family businesses, the plan should contain provisions that ensure fair treatment of family members who are active in the business vs. uninvolved family members.
In what other ways could an experienced business succession attorney help you?
While each company is unique, many family-owned business owners use attorneys to help them achieve additional goals, such as:
- Reducing or eliminating estate taxes.
- Determining who will fill the key roles at the company upon your departure.
- Avoiding probate, which makes your plan public and often creates lengthy and costly delays in the succession process.
- Preventing other family members from selling their interest in the company to non-family members.
Whether you are close to retirement age or simply want to ensure that your company thrives regardless of what happens to you in the future, drafting a business succession plan as soon as possible is a good idea.