Business Succession Planning

In addition to planning to protect their families, assets, and healthcare decisions, business owners must make estate plans to protect their businesses.

A basic business succession plan helps ensure an efficient and orderly succession—and thus the continued vitality of a business—and also helps protect the owner’s loved ones from massive headaches.

Further, for a multi-owner business, a buy-sell agreement is a necessary part of a basic business succession plan to protect the interests of all partners.

More complex business succession plans will begin the transfer process before death, which can provide substantial increases in inter-generational family wealth through transfer tax savings.

However, that subject is mostly only relevant for the very wealthy and will be covered by another article.

Succession vs. Crisis Planning

Let’s distinguish between succession planning and crisis planning.

A crisis plan addresses situations where you cannot run your business but are still ‘around’ such that you remain an owner.

In contrast, a succession plan is relevant when business ownership (in whole or part) changes.

Crisis Planning

A crisis plan is the business analog to planning for personal incapacity. The specifics of the plan will depend on the specifics of your business.

An estate planning lawyer who also understands business matters should assist you in developing a business crisis plan. On this, be wary of the specialist estate planner who does not understand how tax, business, and asset protection matters interact with estate planning.

Generally speaking, you should identify the core functions of your business (such as check-signing authority) and determine how your business may at least “tread water” if you are unexpectedly unavailable.

A limited power of attorney can be helpful here, particularly for the business owner who does not share ownership.

Succession Planning

Without planning in place, a business owned by a single member will end up in probate court when that owner dies.

This can capsize the business for an indeterminate period and is thus likely to be catastrophic.

The attendant problems can even be worse when an owner of a multi-owner business dies. However, a buy-sell agreement can mitigate these multi-owner problems and is discussed further below.

At the very least, all businesses need to have a basic succession plan in place.

Buy-Sell Agreements

A buy-sell agreement restricts an owner’s ability to sell or otherwise alienate a business interest. This is important for any multi-owner business because it ensures that none of the owners end up “in business” with people they do not choose.

For example, if your business partner dies, you may prefer not to have that partner’s family member as your new business partner. Alternatively, if you die, you may prefer that your family is not left in business with existing partners.

A buy-sell agreement helps in either scenario. Further, it is useful in other situations, such as when a business partner files for bankruptcy or divorce.

Notice that it is not evident which side of the table “you” will sit with the buy-sell agreement. That is, will your loved ones end up sellers, or will you be a buyer?

A buy-sell agreement will define various triggering events (death, divorce, bankruptcy, etc.) whereby members (or the business itself) will have reciprocal duties or rights to buy or sell respective interests for a price determined by a stated method that is [hopefully] unambiguous.

The agreement is essential and will be customized to satisfy the desires of all owners.