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Succession Planning Checklist: Five Questions for Closely Held Businesses

When you invest your time, energy and hard-earned assets into building your business, it can be difficult to think about a time when you’re no longer in the picture. Being so intertwined with a small business has risks, however. Closely held businesses, such as family businesses or closed corporations with a small number of shareholders, especially need succession planning to ensure that an unexpected event doesn’t disrupt operations or wreck the company.

Succession planning isn’t just for unexpected contingencies, however. Planning for expected transitions can bring a sense of financial security in retirement and comfort in providing for your heirs with a charted course for your business after your death. Still, fewer than a quarter of small business owners have a formalized succession plan in place, according to PwC's 2017 US Family Business Survey.

Here are five essential questions to consider for succession planning:

  1. Who do you want to run the business next? A key part of succession planning is identifying and developing new leaders to run the business. Do you envision your children or other family members taking over the company’s leadership? Important follow-up questions are whether the next generations of family members have the skills to take over and whether they even want to be involved in the business. If your children plan to sell their stake, it’s better to account for that in advance.
  2. Are you planning to cash out? Owners may want to sell their interest to provide for a spouse or other family members. First, you’ll need to determine the value of the business, and we advise clients to have their business appraised to provide a benchmark valuation. Because business conditions change constantly, a succession plan also can include a valuation formula based on revenue, profit, capitalization and other factors.
  3. Will you be depending on continuing income? A spouse who depends on your earnings from the business now may be left with an ownership interest that provides no direct income and is difficult to sell. Other investors or business partners may have goals that don’t align with your desire to provide for your family. Consider an operating agreement that can address in advance shareholder rights and the process for distributions.
  4. What will happen if partners go separate ways? If business partners decide to split, how will assets be divided? An operating agreement can establish the terms under which a partner can sell an interest in the business and can include restrictions on buyers. For example, it might say that other partners have first-refusal rights if another partner wants to sell an interest.
  5. Are you ready for the unexpected? Death, disability, divorce, disaster and disagreements among stakeholders are known as the “dreaded Ds” in succession planning. Many of these uncertainties can be anticipated and addressed in an operating agreement among business principals.

A comprehensive succession plan will involve all stakeholders in the business. Whether it’s a continuity plan to keep the business going during an unexpected transition or an operating agreement to define how ownership stakes are divested, there are lessons for businesses of all sizes when it comes to succession planning. An attorney experienced in estate and business succession planning can explain the details of various arrangements and help your business avoid financial interruption.

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