The Importance of Business Succession Planning

 Posted on June 30, 2016 in Business Law

Statistics from the U.S. Small Business Administration indicate that more than half of the country’s small business owners are over 50 years of age. Out of that number, only about 30 percent have a written succession plan for their business, and this can pose severe problems for their heirs or other successors in interest. If you are in this situation, it is generally in your best interests to consult an attorney to cement your future.

No Successor?

No one likes to admit it, but if you have a dearth of heirs or business partners that you truly trust, or if finances are not what they ought to be, selling the business as a whole may be an option for when you step down or pass away. An alternative that has been gaining popularity in recent years is to sell your interest (presumably, your controlling interest) to your employees, forming a cooperative or creating an employee stock ownership plan (ESOP). The decision must be based on what is best for you and your family and your employees, of course, but selling to employees does have one advantage: they know your brand and your product. Many employers see this option as similar to giving the business over to family given the closeness involved.

If you have multiple partners, it may also be possible to maintain the business without having a direct successor, simply by distributing your stock among your partners in a standard buy-sell agreement or buyout agreement. This also has the advantage of the personal touch - selling to business partners means selling to people who are familiar with and, in theory, supportive of your direction for the business.

Methods of Transferring Interest

Whomever you decide to name as a successor, it is imperative that the transfer be handled appropriately. Failure to do so can cause legal issues for the future and can, in extreme cases, lead to the breakup and sale of your business. There are two main methods used to transfer business interests, though there are several different options that work.

The first is referred to as a cross-purchase agreement. These accords usually require that the partners purchase life insurance policies on each other, and when one passes on, the proceeds of that policy are used to buy that partner’s remaining stock. Cross-purchase agreements are best for situations in which there is a nebulous plan already in place, where the agreement is a vehicle by which a plan comes to fruition - for example, wanting to ensure a son takes over for this father.

The second common method of ownership transference is an entity-based agreement. This differs in practical application, but the effect is basically the same. The main difference is that instead of the individual partners obtaining life insurance policies on each other, the business as a whole does so.

Consult an Experienced Attorney

Regardless of which method of disposition you choose, having a knowledgeable attorney on your side can ease the process and ensure a smooth transition. The skilled Sugar Grove business planning attorneys at our firm are happy to help answer your questions and guide you forward. Contact us today to set up a consultation.

Sources:

http://www.ilesop.org/index.php?root&t=factsheet

http://apps.americanbar.org/buslaw/blt/2010-05-06/high.shtml