Business succession plans are important regardless of your type of ownership. But a plan may be even more important if you are the sole owner of your company. A lot goes into the successful organization and management of a business.
Business owners often learn from years of experience managing their business. A business succession plan can be helpful to transfer this information to the new owner, ensuring the continued success of the business.
What Is a Business Succession Plan?
A business succession plan is a detailed plan that lists the terms and expectations of the transfer of ownership. Business succession plans are often used when the business owner becomes disabled or deceased. It should include step-by-step directions on how your successor manages the day-to-day of the business.
A business succession plan might include information like:
- The name of the successor, or successors: Consider who will take over primary ownership of the business.
- Timeline: It can also be helpful to include a timeline. Have two plans in place, one for your planned exit from the business, and another, for an untimely exit.
- A list of who should do what in transition: Many family members may step up in an attempt to manage the business, causing conflict. You can avoid confusion and disruption by listing who should manage what during the transition.
- The sale price of the business: Arranging a business valuation ahead of time can also help the process go smoothly.
- Unique financial situations: Unique financial situations, like a one-way cross-purchase buy-sell arrangement, may be needed to transfer the business to someone who does not have the funds available to purchase it.
- Detailed standard operating procedures: Include a detailed copy of your standard operating procedures, including things like employee flowcharts, operations manuals, employee handbook, and training programs. Each of these things will help your successor handle the day-to-day of the business.
- Estate tax planning: Previous estate tax planning will help prevent your successor from being left with a large estate tax bill that they cannot afford, thus forcing them to sell the entire business.
- Intellectual property of business: Include information on how your successor can access intellectual property or patents needed for the business.
- Access to the business contracts: Include a collection of previous, existing, and future contracts.
- Plans for the business: It can be helpful to include desired plans for the business. List whether you want the business to continue, or your heir should sell it.
It can also be helpful to have life insurance in place, especially when the plan is to have a family member take over the business. This can help your successor buy out the business, if needed.
When Do I Need a Business Succession Plan?
It is never too early to draft a business succession plan. A business succession plan is especially helpful if you are a sole business owner, unlike with businesses that have multiple owners, friends and family members may not know what to do with the business.
Small businesses also do not usually have as much capital available and without the knowledge and expertise of the business owner, new owners may not succeed. This could lead to financial losses for the family, and the loss of employment for your employees.
Here are just a few situations in which a business succession plan would be helpful:
- To sell your business to an outside buyer
- To sell your business to a partner, or employee
- To pass your business to an heir
- To sell your business shares back to the company
- To provide your family with guidance
If you do not have a business succession plan in place and you are an unincorporated sole proprietor, this ownership will dissolve with your untimely death. All of the business assets will be combined into the estate and given to the nearest survivor, or whoever is listed in the will.
Sole proprietor business owners who do not want to dissolve their business and would instead, prefer to transfer it to an heir, or employee, will need a business succession plan in place. A business succession plan can be helpful even for family members who ultimately plan to eventually sell the business. It can take time for a business valuation to take place and to find a buyer. Without guidance, the business could lose money during this process, leaving the family with significantly less profit.
Sole business owners may also be registered as a limited liability company (LLC). A sole owner LLC operates similarly to a sole proprietor.
Do I Need a Lawyer to Draft a Business Succession Plan?
There are many reasons to consider using a lawyer to draft your business succession plan. Each business is unique and has different needs. A lawyer can help you consider the different aspects of your business that you need to plan for. They can guide you on unique situations and assist you with drafting your plan in a detailed, legal method.
Business succession plans also often include numerous other important documents, like a business valuation, buy-sell agreement, tax documents, and a list of your business assets. Your North Carolina estate planning lawyer can assist you every step of the way, ensuring you have a thorough and legal plan.
While retirement might seem like a long way off, it is never too early to develop a business succession plan. Consider what will become of the business that you have put so much of your hard work and hard-earned money into. Give the business a chance of succeeding, even when you are no longer involved with it. Many people draft a will or do estate planning to ensure that their family knows what to do with their personal belongings, so why not create a business succession plan?