Turner Padget Insights
5 Questions for Business Owners When Succession Planning
Posted On August 26, 2024
Building a business comes with risks and rewards, and one of the biggest challenges for owners and shareholders is deciding how and who should lead the company in the future. Whether a projected succession, such as retirement, or an unexpected event, without careful planning, company operations can be severely disputed if a key leader steps aside.
Here are five questions we encourage business owners and shareholders to consider when developing their succession plans.
1. Who do you want to lead the business next?
Identifying and developing new leaders is a cornerstone of succession planning. Do you see your children or other family members stepping into leadership roles? Does the next generation have the necessary skills and interest in managing the business? Planning for this in advance can help mitigate potential issues if they intend to sell their stake.
If your family members are unable or unwilling to take over the business, finding an external leader becomes essential to ensure the continued success and stability of the company. This process involves identifying a candidate who possesses the necessary skills and experience and aligns with the company’s values and vision.
An outside leader can bring fresh perspectives and innovative ideas that drive growth and adaptation in a competitive market. Additionally, this transition requires clear communication with all stakeholders to maintain trust and transparency during the leadership change.
2. Are you planning to cash out?
If you plan to sell your interest in the business to provide for a spouse or other family members, you need to determine the business’s value. We recommend getting a professional appraisal to establish a benchmark valuation. Given that business conditions can change, incorporating a valuation formula based on revenue, profit, capitalization, and other factors into your succession plan can provide flexibility and accuracy over time.
3. Will you continue to rely on your income?
A spouse or dependent who relies on your business income may face challenges if left with an ownership stake that does not generate direct income and is hard to sell. Consider the goals of other investors or business partners, which might not align with your family’s needs. Establishing an operating agreement can clarify shareholder rights and distribution processes, ensuring your family is provided for.
4. What if your partners break up?
How will the assets be divided if business partners go their separate ways? An operating agreement can set the terms for selling a business interest and include restrictions on buyers, such as giving other partners the right of first refusal. This helps maintain stability and control within the business.
5. Are we ready for the unexpected departures?
Death, disability, divorce, disaster, and disagreements – known as the “dreaded Ds” – can significantly impact a business. While these uncertainties can’t be entirely avoided, they can be anticipated and addressed through a comprehensive operating agreement among business principals.
A robust succession plan involves all stakeholders and prepares for both expected transitions and unforeseen events. Whether through a continuity plan to maintain operations during transitions or an operating agreement to manage ownership stakes, businesses of all sizes can benefit from careful succession planning. Consulting with an attorney experienced in estate and business succession planning can help ensure your company avoids financial interruptions and continues to thrive. By addressing these fundamental questions and planning proactively, you can safeguard your business’s future and provide for your loved ones, ensuring a smooth transition and ongoing success.
C. Pierce Campbell is a shareholder and CEO of Turner Padget. He helps businesses across South Carolina plan for the future through effective succession plans.
