Business Succession Planning
Let’s assume you are living your dream: you operate a successful business that has been supporting your family and is continuing to grow. In the midst of managing day-to-day successes, however, you must take care not to neglect the long term interests of the business and, in turn, your family. If, as is typical, a large portion of your net worth is tied up in the family business, a lack of long term planning can be devastating. Fortunately, even a relatively simple succession plan can help alleviate many of the typical problems that arise with an otherwise unplanned for event.
There are two basic plans the business owner should consider – an emergency plan and a succession plan. For the emergency plan, you need to consider what would happen to your business if you were to die or become disabled – tomorrow. Long term planning involves developing your ultimate exit strategy from the business. You need to consider whether you plan to eventually transfer the business to third parties, partners, employees, family, or some combination of them. With the proper preparation you can save trouble and taxes. Advance planning allows you to consider the full arsenal of management succession, tax planning, estate planning and other techniques, some of which may take many years to implement (such as management training or gifting to family, for example). Some issues to consider:
Management. Do you have a management structure that provides officers or other employees with the training and experience to step in and keep the business going? Many businesses struggle or fail at the death of the owner. Even the mechanics of simple items such as paying bills or finding keys and passwords can provide daunting obstacles--not to mention the crucial tasks of maintaining customer relationships and performing core services. It is almost impossible to preserve a business’ value if all of the crucial talent and information resides largely with the entrepreneur. One obvious warning sign: if you can’t take a two week vacation without damage to your business, you need to work on your management team. Not only will the business be unlikely to survive your death or incapacity, you really do not have much to sell or transfer to your family when the time comes without management succession.
Business Documentation. Another element of succession planning is ensuring that you have the appropriate legal documentation within your business. Your company’s structure should be organized so that there are others within your organization who have the legal authority to manage the business in your absence. The precise nature of this structure obviously has to be tailored to fit your business, but may involve formally organizing as a corporation or limited liability company if you have not already done so (or updating existing documentation that is now out of date). In many cases, a more formal management structure is embodied in bylaws, corporate minutes, operating agreements, or other similar documentation. If your business has more than one owner, you also need to have buy/sell planning appropriate to your business structure. Buy/sell documentation should include terms such as an agreement on valuation technique, clear triggers for the obligation to buy or sell, and a method for funding the purchase obligation.
Estate Planning. Even if you have a
business succession plan in place, your family can still face
road blocks if your estate planning is not also complete.
The business owner needs to have, at a minimum, a will and
power of attorney, to help ensure a smooth succession of
ownership powers whether due to death or disability. A
will not only specifies who in the family will inherit the
business and in what proportions, but can provide a trustee for
beneficiaries who are minors or have other disabilities.
A power of attorney is a simple but powerful document that
allows another person to act on your behalf if you become
incapacitated. A power of attorney lapses on death but
prior to that can provide an agent who could exercise your
powers of ownership. A trust (which combines many of the
features of a will and power of attorney) may also be
appropriate depending on your individual circumstances.
In whatever form, the estate plan should take into account, and
dovetail with, the business succession plan.
With good advice and good planning, you can minimize tax
consequences, plan a smooth transition and, above all, protect
the value of your business for you and your family.
Brent Kinkade is the head of the Trusts and Estates department
at Karnopp Petersen LLP. Brent focuses his practice in
the areas of business law, trusts and estates, and real estate
law. He can be reached at 541-382-3011 or bsk@karnopp.com. This
article was prepared with the assistance of Jeff Ellsworth,
associate attorney in the Trusts and Estates and Business Law
departments of Karnopp Petersen LLP.