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What is succession planning for business owners
What is succession planning for business owners

What is succession planning for business owners?

If you’ve built a business with your own two hands, that business is likely part of your identity – and vice versa. You are the engine behind your business, and building that business is your primary motivation to keep working hard. Whether you’ve been working on your business for a few years or a few decades, it’s hard to imagine life apart.

Yet none of us last forever, and the reality is that a successful business might well outlive its founder. That of course is the goal of many entrepreneurs – to build an enterprise that extends through time well beyond their own lifespan. So, what can business owners do to help make this happen? 

Transitioning a business can be a minefield, but it’s worse if there is no well thought out succession plan. Business owners that have never given serious to such a plan are often left scrambling at the end of their careers, either desperately looking for a younger partner or bracing themselves to sell the business at a loss. Neither needs to be the case. 

Proper succession planning can be just as crucial to a business’ success as sales or revenue. A business lawyer can provide advice and guidance on how to establish that plan, and how to carry it out when the time comes. Here are some considerations to keep in mind during your planning: 

Get the Right Advice

Legal advice is critical when it comes to matters related to shareholder agreements, powers of attorney and estate planning, and how to deal with employee liabilities, all of which are fundamental to business succession. However, legal advice is not the only element to consider. Financial advisors and accountants are also key when it comes to formulating an effective plan, both in terms of dealing with the tax implications of any sale as well as handling your share of the proceeds from any sale, and how to best structure the deal to minimize your tax burdens. If your accountant is not familiar with succession planning, then consider consulting an expert who is.

Along with legal and financial advisors, it may be worthwhile to consult with mentors and colleagues in the industry who have recently been through a similar transition. They may be able to offer wisdom or best practices of their own to help guide your hand as you prepare your strategic plan.

Family Businesses Are Unique

Just because you have children, that does not mean that they are a perfect fit to take over your business. Some businesses are inter-generational and can last for decades under family control. Others though may not.  This is especially true where the next generation either does not want to be involved in the business or is not the right fit to lead the company. 

It may sound obvious but be cautious of children who expect to have a successful business handed to them on a platter, especially with no experience in management or the technical skills required of your trade. Not only is there knowledge needed to run a business, but there is a certain finesse that often comes from working years in the business oneself to learn every aspect of them.

There are an array of taxation issues, such as capital gains tax, which should be discussed with a financial advisor before passing down a family business. Proper strategic planning can help plan for the tax burdens on both you and your children, but this needs to be considered early.

Know Your (Future) Role

Think about what sort of role you would like to play in the business before, during, and after your exit. Are you hoping to stay on in some sort of consultant or advisor capacity? Would you be open to being an employee, or staying on the Board of Directors? Or are you looking to make as quick an exit as possible and not look back.

The reality with the final option is that sales and transitions rarely happen overnight. It may take months to complete a transaction, so do not expect that you will be able to make an overnight exit. Instead, look at a multi-stage plan that considers a gradual exit from the business.  This will require you to consult with the proper advisors well in advance of the ultimate end date. 

Think of Your Employees

Employment issues are often ignored or last-minute thoughts in the sale of a business, and it can make an already complicated situation even messier. There are two different ways to sell a business – either as assets or as shares – and the method that you choose can make a significant difference for your employees and your continued liability. 

A share purchase, where you sell the shares of your business, may not necessarily affect your employee contracts. However, if you are planning to sell the assets of your business, your employment contracts may be affected, depending on which assets are sold. Employee termination may be required to complete the transaction, which is itself a complicated issue. 

Terminating employees can have a significant impact on your deal and may create major unexpected costs, especially if you have long-term employees. Selling the business may be effectively terminating their employment, so the liability associated with the employment law issues is usually a heavily negotiated point.   Thus, it is critical for business owners to obtain timely advice from a trusted employment lawyer to discuss how you may limit your liability and save money associated with employment matters.

Plan Early, Just in Case

While we think of succession planning as a retirement strategy, the unfortunate reality is that something may befall us before we reach our 60s or 70s. If you are in an accident or suffer a serious illness, then you may need to exit your business much earlier than anticipated, and your exit plan can be helpful then as well.

The above topics are just a few of the many items to consider as you look at successful succession planning.  However, the key is to seek professional advice early so that you are prepared. Our business and employment lawyers at Pavey Law are here to help you navigate the things that you haven’t thought about and ensure that you complete a successful transition. Contact us today to set up a consultation.