What to Consider & Include in a Business Succession Plan

Planning your retirement from a business you can cause some mixed emotions, so it would be only natural to want to put it off as long as possible. However, it will be less stressful at the time of your eventual leave-taking if you start planning for it now to your desires legally binding.

Succession to a Family Member

It would be natural for you to want to keep what you started within your family's control. The problem is making sure a family member is up to the task, and is desirous of the role. It could be that you have several contenders who covet the role. On top of that, there may interfamily member disputes going on because of divorce and other issues. Some of the members may have stock in the company. It would seem like you would need the wisdom of Solomon to figure it all out.

The person you choose succeed you should be the one that is the most self-sacrificing,  and who would want to see the business thrive and expand. They would be willing to do what it takes to gain knowledge and experience, listen to others, and also cooperate with the other partners or management team.

To give this person support to do the things they will need to do, you should develop a governance plan with an attorney that covers other family interests, protects yours, and establishes your successor's authority.

Selling Your Share

If you want to bypass succession and just want out, you may decide to sell your share of the business to your partners in a buy-sell agreement.  You will first need to determine its worth. Valuation of a business can be made by:

  • An arbitrary agreement amongst the partners
  • An appraisal made by a CPA
  • Determining the amount of shares in the company you have and their current market value

After your share of the business has been valued, then you want to have life insurance in place to protect the business in case you or one of your partners dies before retirement.

Insurance in Place

If you and your partners are in the same age range and are in good health, and there are a small number of partners, you may want to take out life insurance policies on each other for the value of each member's share in a cross purchase agreement. Each one of you would be both owner and beneficiary of the policy so if one of you dies, you could reimburse the estate of the deceased for their share with the proceeds.

This may not be practical if there are big age differences between the partners or if the partners number more than three or four. In this case, a policy is purchased through the business for each partner in an entity purchase arrangement and the proceeds of the arrangement would used the same way. This is a simple arrangement that can be used as an expenditure for the business.

There are also hybrids of these type arrangements that might suit your interests better.

Your succession plan will need to cover transition issues, estate planning, financing, taxation, roles of family members, and more. You will want an legal adviser like Risley Law Firm, P.C. who can help you create one that assure that your needs and desires are taken care of, and ensure a successful continuation of the business.