Business owners work hard for years to build and grow their company. As both the owners and the company mature, however, it is natural to consider what to do with the business when the current owner is no longer in charge. It is important to have a business succession plan to ease the transition process. The following article will give an overview of business succession planning and offer advice for when and how to begin the succession planning process.
What is a Business Succession Plan (BSP)?
A business succession plan is like a last will and testament for a business. It addresses the transfer of ownership and control of your business when the current owner cannot or chooses not to continue running the company. While no two BSPs are the same, a well drafted plan will generally address all of the following concerns: (1) Who, if anyone, will take control of the company? (2) How will such ownership be transferred (i.e. stock buyout, gift, etc)? (3) Under what conditions will the BSP become effective? (4) What are the contingency plans if the original BSP is infeasible or impossible? Finally, (5) What, if any, role will the current owner retain in the business after the BSP has been implemented.
Benefits of Having a BSP
Having a business succession plan provides many tangible and intangible benefits. While having a BSP is generally a good idea for any sized company, such plans are especially important for small to mid-sized business. Additionally, most family owned businesses fail or close within a few generations, so having a BSP can be especially critical for these types of companies. The benefits of having a business succession plan include:
1. Providing Certainty
Succession planning gives the current owner and investors security and certainty about the future of the business. A BSP gives the current owner the opportunity to talk to the people they wish to succeed them. Current owners may be surprised to find the individual they assumed would take over the company has no interest in doing so. Plus, investors, shareholders, and other interested parties will appreciate the company having a BSP that names a clearly chosen, competent successor and avoids any unnecessary volatility during the transition process.
2. Helps the Successor Plan for Their Future Role in the Company
Having a BSP allows the chosen successor to learn from and grow with the company. If such decisions are made when the chosen successor is still young, the successor is able to tailor their education and experience to maximize their future role in the company.
3. Defining the Current Owner’s Future Role
One final, but important, component of a well drafted BSP is the ability to plan and determine in advance what, if any, future role the current owner will play in the company. Oftentimes business owners find it difficult to go “cold turkey” when leaving their business. A BSP gives the successor insight into the current owner’s future executive desires, which may allow the successor to create appropriate positions within the company.
When to Create a BSP
Generally, the younger your company, the less important it is to have a formal business succession plan. One of the first significant milestones to begin thinking about a BSP is when your business achieves sustained profitability. When a company makes it into the black, especially if future projections look good, it may be a good time to begin informal succession planning. This exciting business achievement can be an excellent opportunity to talk with spouses, relatives, or friends about their interest in the future of the company and any desires they may have in running the company.
Another excellent opportunity to create or modify a BSP comes when amending or creating the current owner’s last will and testament. Often, owners directly address small businesses in their will. Pivotal life moments such as marriage, divorce, having children, or deaths in the family are critical events for both a BSP and a will, so updating one naturally leads to updating the other.
If nothing else, a BSP should be in place when the current owner decides they will retire in the near future. Because of the potential tax, business, and social ramifications surrounding the succession plan, it is best to give a year or longer for the planning process. The larger and more complex the business, the more likely a BSP will require professional drafters and ample time to specifically address opportunities and concerns.
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– Norris Legal, L.L.C.
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