Any small business owner will tell you how difficult it can be to keep a business up and running, but planning a business’ future can be just as complicated. This planning for the future is called business succession planning, and it encompasses all the financial and logistical decisions surrounding your business’ eventual successor. Usually, the first step of this process is deciding who your successor will be, and then creating the best selling arrangement, which typically includes a buy-sell agreement that’s secured with a loan or life insurance policy.
Once you choose a successor, you’ll need to figure out how to exit yourself. You can do this by either selling the business to an outside buyer, a key employee, or your business partner, or by simply transferring the business to your heirs.
Next, you’ll need to get your business appraised. Even if you aren’t looking to sell in the near future, it’s never a bad idea to estimate the value of your business. Not only will a business appraisal help you develop a retirement income strategy, but you can also appraise company shares for future owners as well as help you choose the right protection planning insurance. This appraisal may also help attract investors or other potential buyers in the future.
So how about the plan itself? A good business succession plan will include:
Your business’ primary and secondary successors
Your business’ valuation
A succession timeline
How the succession will be funded
Standardized operating procedures
Once this is all set in stone, you can start evaluating different strategies to see which one suits you and your situation best.
Selling your business to your business partner is perhaps the most common route. Most business partners draft formal agreements outlining the succession of the business in the event of one of the partner’s disability or untimely death, whereupon the surviving business partner will usually buy out the shares from the deceased partner’s next of kin. These kinds of buy-sell agreements streamline the transition process and ensure that the deceased partner’s next of kin will receive the proper compensation while still allowing the surviving business partner to continue operations.
Another popular method is passing on the business to an heir. This largely benefits the successor, who will receive a fully-functioning and operating business, but you can also rest easy knowing you are still providing for your family by passing it off to a trusted successor. Of course, you should still make careful preparations for this succession plan by first deciding who will inherit the business and then providing them detailed instructions on how they and other heirs will be compensated. Some of these instructions in your buy-sell agreement may explain how heirs who are not active in the business can sell their shares to those who are. It’s also wise to detail future management structures in advance so that there are no misunderstandings later on.
Whatever your legal business needs are, our team of seasoned business litigators at Bashirah Martin will be there to field all of your questions, comments, and concerns, while fiercely advocating for you in the courtroom. To learn more about how we can best serve you, give us a call today at 281-747-1326.