Business Succession Planning
What is Business Succession Planning?
Business succession planning is the process in which long-term needs are identified and addressed. The main concern in succession planning is in providing for the continuation of business operations in the event that the owner or manager retires or suddenly becomes incapacitated or deceased. This can occur by several means: for example, transferring leadership to the following generation of family members or by naming a specific person to become the next owner.
It is highly advantageous to have a business succession plan. It can create several benefits for the business such as tax breaks and no gaps in business operations. The plan will be formally recorded in a document, which is usually drafted by an attorney. It is similar to a contract in that it has binding effect on the parties who sign the document and consent to the plan. Therefore the main advantage of having a succession plan is that the organization will be much better prepared to handle any unforeseen circumstances in the future.
What should be included in a Business Succession Plan?
A well-thought out succession plan will be both very broad in scope and specific in detailed instruction. It should include many provisions to address other concerns besides the issue of who will take over ownership.
A business succession plan should generally include:
- Approximate dates or time frames when succession will begin, for example the projected date of the owner’s retirement. Instructions should also be composed for steps to take as the date approaches
- Provisions for what should occur incase of the owner’s unexpected incapacitation, for example in the event of severe illness or death. A replacement should be named, and you should state how long their responsibilities will last (i.e., permanent or temporary)
- Identification of who will be the next successor or a guideline for how election should occur, and instructions to ensure a smooth transition
- A strategic plan for the business after the succession has taken place. This should include any new revisions to current policies and management structures
These are only a few suggestions which demonstrate how complex business succession can be. This is why it is usually necessary to have a lawyer draft the final document. You should view business succession as an entire process rather than a single isolated event. In fact, it would be ideal to begin creating a business succession plan during the initial phases of business start-up. It is important to have the plan drafted well before retirement approaches.
What kinds of Legal Issues arise in connection with Business Succession?
As you might expect, there are many legal matters to be addressed when creating a succession plan. Some common issues that arise in connection with business succession include:
- Choice of successor: If the succession plan does not clearly name a successor, it can lead to disputes, especially amongst family members who may be inheriting the business. Be sure to state exactly who will take charge
- Property distribution: If there is any property in the previous owner’s name, this will need to be addressed so that the property can be distributed upon or during transition
- Type of business form: Every business form has different requirements regarding succession. For example, if it is a corporation, the previous owner’s name must be removed from the articles of incorporation and replaced with that of the successor’s. On the other hand, partnerships will usually dissolve upon the death of a partner; it must be re-formed unless specific provisions are made in a contract
- Tax issues: Any outstanding taxes, debts, or unfinished business must be resolved. Also, if the owner has become deceased, there may be issues with death taxes
- Benefits: You should ask whether the business will continue to render benefits even after the owner has retired. For example, health care, life insurance, and retirement pay must be addressed
- Employment contracts: If there are any ongoing employment contracts, these must be honored so as to avoid an employment law disputes. For example, if there is going to be a change in management structure, it must take into account any provisions contained in the employees’ contracts
Do I Need a Lawyer for Business Succession Planning?
Business succession planning requires much attention to detail as well as a working knowledge of various business and employment laws. For this reasons business owners usually hire a lawyer to assist them in drafting the plan. Also, in the event of a legal dispute over succession matters, an attorney can help with dispute resolution.
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Last Modified: 04-17-2012 02:38 PM PDT
