What is Succession Planning?

If you’re a business owner, you have a million and one things to worry about…from payroll to printer toner. But does that list include succession planning? It’s one of the most important items that can ensure the profitability and longevity of your company.

You may have no intention of passing your business down to your children. That’s fine. But you should still consider how and to whom you want to leave the company, whether via sale on the open market or to trusted employees. You want to see the greatest return for your hard work.

Part of succession planning is creating a medium to long-term plan for transitioning ownership and/or control. This might be to one of your family members or one or more long-term key employees, to your existing partners, or to an outsider/competitor.

When you work with an experienced business attorney to develop a succession plan, you can layout the steps necessary to ensure a successful transition. If it’s going to be to a family member or a long-term employee, you’ll want to bring them into the loop on strategic and financial decisions long before they assume ownership and control. It is also essential to have an emergency plan that accounts for illness and other personal emergencies so that there is continuity in the business notwithstanding personal problems of the owner.

The attorneys at NM Law, APC  know first hand that it is also extremely important to take measures to consolidate power in the hands of those you intend to be the leaders. Many times family-owned businesses are full of, well, just that, family. These businesses often suffer from fierce litigation over control when the matriarch or patriarch begins to step down because a family member who was intended to be a silent owner attempts to usurp power from the persons who have been groomed to run the business. Even if unsuccessful, these attempted coups take their toll on the business, including on company morale and employee retention. Some good planning and communication before any transition can save millions of dollars in litigation and keep a successful business from being destroyed.

An additional aspect of succession planning is an evaluation of various tax ramifications on both the buyer and the seller. Your attorney can help you with the possible ways to structure the sale or transition that make the most sense and are the most advantageous regarding the tax laws … this includes insurance options, income tax consequences, possible restructuring of the business entity or entities and analysis of any estate and gift taxes.

Did you know that it takes on average two to four years to sell a small business?

That should tell you the importance of long-term planning and how critical it is any successful business sale. You simply cannot wait until it is a “fire sale” due to illness, divorce or simply being too old or burned out to continue, you have to commence when you are in charge of the timeline. If a buy-out or transition through gifting occurs through a number of years then there is the added benefit of valuations to be spread over a period of time so any short-term dips in income or value are not reflected in the entire buy-out price.

You need to keep updated records, a detailed business history, and a sales portfolio at the ready. In addition, you should determine the market and your prospects. You and your attorney must evaluate your options and make the best selection for the long-term so that you choose the best person to buy and run your business.

Your attorney will draft the proper documents to bind buyers and will assist with formulating the team necessary to determine the best valuation method, along with consultation regarding other details such as the terms of payment, equipment, real estate, and insurance components of the plan.

Plus, you should be ready to stay on for a period of time as a consultant to help with an orderly transition to the new owner if asked.

While you’re preparing to sell or transition your business, you also need to plan for life after succession…Is your financial future secure?

Business succession planning goes hand-in-hand with estate planning and financial planning. You need to plan for retirement, and regardless of how you leave your business, you’ll need to pay for expenses in your later years. You can work until you drop, but most of us want to relax and enjoy our senior years rather than facing the million and one things every day when we’re in our 70s, 80s, and 90s. Sound financial planning will ensure that your retirement is enjoyable and not filled with worries about money.

You also should plan on the possibility of a disability or the need for long-term care.

Finally, like it or not, we’re all going to pass away at some time, and you should be certain that your estate is in order and all of the instructions are set to transfer your wealth as you like.

Waiting too long or not planning in advance can result in a business owner missing their window of opportunity to sell or transfer their business. It can also mean unnecessary and costly problems in retirement.

It’s imperative for your company to create a formal succession plan to increase your chances of success and a more lucrative sale of your business.

Succession planning for your business should start today. Contact NM LAW, APC (949-253-0000) to speak to an experienced succession planning attorney about your company and your plans for the future.

Disclaimer: This article is intended to provide a general summary of laws in the State of California and should not be construed as a legal opinion nor a complete legal analysis of the subject matter. Noelle Minto is an attorney at NM Law, APC in Tustin, California, a law firm specializing in Trusts & Estates and Business Transactions.