Your business means a great deal to you. You likely want it to continue after you’re gone, and you’d rather avoid a situation where your family members or other parties fight for control.
Creating a succession plan is the best way to keep your business legacy intact. What’s more, it could have an enormous financial impact. Harvard Business Review estimates that better succession planning could lead to 20% to 25% higher company valuations and investor returns for the large-cap U.S. equity market.
In this article, we’ve put together a guide to planning for business succession. We provide an overview of who should participate, what to consider, how succession fits into your personal estate planning, and how your business lawyer can help.
Who Should Participate in Succession Planning?
Other Owners
Succession planning tends to be more straightforward for small businesses with only one owner. If you are not the sole owner and manager of your business, there are other parties who should have a say in the plan. If your business is owned by multiple family members or partners, they should all be involved.
Your Spouse
Washington is a community property state, which means you and your spouse together hold any property acquired during your marriage. In other words, your spouse may have partial ownership of your business by default. You will likely need to consider your spouse’s input in your business succession plan.
Ask your spouse if they would want to remain in the business if you passed away or needed to step down. Would they want to manage the business? Or would they prefer to simply receive equity and the right to sell your share of business? Whatever your succession plan may be, it’s important to make sure your spouse supports it.
Management and Ownership
As you plan your business succession, you will need to think about both management and ownership. While management controls the day-to-day decisions in your business operations, owners have the right to a portion of net profits and a say in major decisions. Owners are often involved in management, but not always.
For instance, let’s say you own a small family business. You have several adult children, and one of them works at your business. Your succession plan might include equity ownership for all of your children, but give your management authority to the child who is actively involved in the business.
In another example, let’s say you are the sole owner of a business and have a younger child. You would like to provide for your child’s future, but if something happens to you unexpectedly, they won’t be ready to manage the company. In this case, you could plan for your business to hire a management company or specify a sale in which the business proceeds go to a trust for your child.
Business Succession as Part of Your Estate Planning
Your estate planning is closely tied to your business succession planning. If your estate doesn’t include enough cash to pay estate taxes, your successors may be forced to sell your business. In some cases, purchasing life insurance can give your successors more liquidity.
Consider all of your business’ assets and liabilities, including any property you own or lease. If some of these assets are in your own name rather than the company’s name, you will likely need to include them in your personal estate plan. There may be tax or legal implications you don’t expect.
If you are aging or dealing with growing medical challenges, you may want to think about transferring business ownership during your lifetime. A gift during your lifetime will have different liquidity and tax implications from a transfer after your death. However, transferring your business during your lifetime may mean losing your income from the business.
A business lawyer can help you understand the legal implications of your succession plan. They may be able to present alternative ideas that are more beneficial to your loved ones.
Other Aspects of Succession Planning
For your succession plan to succeed, you will need to secure the most critical positions for business continuity. Think about who can step into your shoes after you’re gone. If that person also fills a critical role right now, consider who can then fill that position.
If there’s no one at your company who would be immediately ready for each critical role, think about how you can develop a pool of talent before you leave your business. Look for high-potential employees who show loyalty to your business.
You will also need to communicate your business strategy to your successor. Your strategy may seem obvious to you, but it may not be as clear to someone who isn’t in your position right now.
You might want to create documents that identify the following:
- Critical business success factors. These include needed skills and institutional knowledge. Ideally, you should aim to capture the institutional knowledge that you and other individuals possess in writing.
- The details of day-to-day operations. Your successors will need access to all your business passwords and accounts, plus any documents that relate to your contracts and business relationships.
- Any significant future business challenges. If you foresee challenges in the next five years, you may want to document them or otherwise share them with your successor.
Get Help Planning Your Business Succession
The Anderson Hunter Law Firm provides full-service business representation in Western Washington. We can help you through the details of business succession and personal estate planning.
With roots dating back to 1893, our firm has a reputation for high-quality legal services at a fair price. Our lawyers have the experience to help you create the best possible succession plan for your business.
Schedule a consultation with a lawyer today for help with planning your business succession.