Turner Padget Insights
What Is a Business Succession Plan?
Posted On October 17, 2019
What Is a Business Succession Plan and Why Do I Need One?A business succession plan provides instructions to guide all stakeholders in a business through a change of ownership. Every business undergoes changes during its lifecycle, and business owners’ goals and circumstances change as well. Even though you may not be planning to hand over the reins to your business anytime soon, it’s vital to have detailed transition plans in place to allow operations to continue without financial interruption.
A comprehensive business succession plan should include the following:
Decisions on who will run the business
A primary part of any succession plan is identifying who will take over operations of the business. In a family-owned business, consider whether there are those in the next generation who have the desire and skill sets to take over the company’s leadership. A succession plan should include policies and procedures on when and how family members will be hired, who will supervise them and how compensation will be determined. Whether family members or employees take over business operations, you can help build your business to last by developing new leaders with education and training before transition plans are set in motion.
Continuity plan
In order to keep the business running smoothly during a transition, stakeholders will need access to operating procedures, training documentation, employee handbooks and other key assets. Collect documents in one place to avoid scrambling when changes happen. A continuity plan is especially important for closely held businesses, such as family businesses or closed corporations with a small number of shareholders, to ensure that an unexpected event doesn’t disrupt operations or wreck the company.
Operating agreement
An operating agreement can address in advance shareholder rights and how ownership stakes are divested. Every business should be aware of the “dreaded Ds” in succession planning – death, disability, divorce, disaster and disagreements among stakeholders – and these uncertainties can be addressed in an operating agreement among business principals. If business partners decide to split, define how assets will 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. If any successors want to sell or transfer their interests in the business, a buy-sell agreement can govern the transaction.
Valuation method
At Turner Padget, our succession planning checklist advises clients to have their business appraised to provide a benchmark valuation. However, business conditions change constantly, so setting a price in advance of an eventual transition probably isn’t realistic. A business succession plan can define in advance the method by which the business is valued. The valuation method could be based on formulas that consider revenue, profit, capitalization and other factors. An accounting firm with valuation experts in your industry also can help determine the price.
Whether a business transition is unexpected or planned, a business succession plan is key to providing financial security for stakeholders and comfort in charting the future course for your business. Begin the process by identifying goals for your business and consulting a lawyer who is experienced in business organization and estate planning to guide you through a checklist of questions for creating a comprehensive business succession plan.
