Wikipedia defines succession planning as “a process for identifying and developing new leaders who can replace old leaders when they leave, retire or die.” This definition seems just right, provided the term “leaders” encompasses business owners and managers alike.
There are several million privately-held U.S. businesses that are owned by Baby Boomers who are set to retire in the next 10 to 15 years, yet only a small percentage of these businesses have a succession plan in place. Perhaps many of these business owners are managing the day-to-day operations of the business and are focused on more immediate issues like profitability. Or maybe emotional factors are preventing them from turning their attention to succession planning, which can be a difficult topic to think about. It is important that business owners not delay in developing a succession planning strategy and in preparing their businesses for transition while there’s still an opportunity to do so on their own terms.
Succession plans should be in place for business continuity in the short-term and long-term. The short-term succession plan should address successorship in company management due to an emergency absence or unexpected disability or death, for example. In a previous blog article, we discussed using a Business Power of Attorney to meet the interim needs of a business in this type of transition. A succession plan that looks further into the future might be quite different in terms of management succession and would also describe the path to successor ownership of the business.
Succession plans for closely-held businesses are not one-size-fits-all. Some owners may want to sell their business but continue to play a role in the business after the sale. Others may be looking for a complete exit. In some cases, the successors may be obvious but that’s not always the case. Whatever the situation, a succession plan should be considered from ownership and management perspectives and take into account the unique objectives of the current owners.
There are many issues to consider and several important questions to answer as a first step in developing a succession plan. Here are just a few:
- What does the business owner want to do after retiring?
- Who are the potential new owners and how might ownership be structured?
- Who is best-suited for management?
- When is the ideal time to implement the plan?
- What interim steps should be taken to increase value for the current and next generations?
- Do the entity’s governing documents (e.g., Bylaws, Shareholders Agreement, or Operating Agreement) address succession already?
- What estate planning and tax planning strategies should be considered?
Several structures are available to business owners looking to put an ownership succession plan in place. Examples include owner buy-sell agreements, gifting or selling interests in the business to family members, management buyouts, and transfers to employees through employee stock ownership plans. And depending on the succession plan’s structure, the business might consider purchasing key man life insurance for owners and key employees. The proceeds from these insurance policies may be used to fund a purchase obligation under a buy-sell agreement and to offset financial losses sustained as a result of the death of an owner or key employee rainmaker.
We hope you find this information helpful as you consider your business succession plan. For other insights on succession planning, specifically for family-owned businesses, you might want to read this article.