Business Succession Planning: All Good Things Must End

Everyone must leave their business at some point. The wise business owner plans for this eventuality. In my practice, I have represented both sole business owners and joint business owners. Both types of ownership have very different interests and concerns. As in most matters I assist folks with in my law practice, the primary motivating factor is avoiding costly and painful problems for you and your family. If something ever happens to you, your family will have to pick up the pieces.

Sole business owners must address the following:

• Succession. A couple of questions you should address are: Do you have a family member or employee that can take over your business; do your employees wish to buy you out? Either way, you, or your family should receive a fair payment for their interest in your business to compensate your spouse or children. I recommend a CPA value your business or you hire a professional business valuator or appraiser. Any appraiser should value raw assets, inventory and goodwill.
• Liquidation Before Death. If you have no one that can succeed you, use your valuation or appraised value and seek out a good buyer. You can find good prospects by asking your friends in the industry, asking your suppliers or hiring a professional business sales broker.
• Liquidation After Death. If you wish to wait until your death, leave clear written instructions (including the above matters) for your family, modify your Will; and have a plan to operate your business in the short run, until the survivors can locate a buyer. Your primary concern is to avoid a fire sale.

Joint business owners must address the following concerns:

• Business Value. If a partner leaves or dies, determining a fair buyout value is critical. The departing partner tends to overvalue the business, while the remaining partner tends to undervalue it. I recommend using a qualified CPA or professional business valuator or appraiser to value the business. They will ask the tough questions and develop a formula to calculate the value of the business. I highly recommend an agreed-upon valuation formula, as the value of the business will change over time.
• Death of a Partner. When your business partner passes away, you immediately have a new partner. Either your partner’s spouse or heirs will immediately become your partner. How well do you think his or her spouse (or heirs) know your business or will work with you? Working out an agreement with your partner’s heirs can take both a lot of time and money. Avoid this hassle with pre-planning. Partners should agree to buy the other out in case of death and purchase an insurance policy on each partner to fund the buyout. Whatever is decided, the business partners need to have set and review the business valuation formula each year.
• Business Secrets/Data. Besides laying out how to value the business monetarily, good plans protect the businesses secrets, business data, and other non-liquid assets. A good attorney will help you develop appropriate protection and non-compete agreements.
• Annual Update/Other Concerns. Succession Plans should include an annual date to discuss your business’s structure and future goals with a qualified business attorney. In these meetings, you should discuss any likely scenarios affecting your business’s future, such as allowing a partner’s family member(s) to join the business, a key employee departure, retirement plans, etc. Good advance planning is good business.

How well you create a succession plan determines the life or death of your business. Seek professional financial and legal advice during the planning process. A good business with proper planning can last longer than a lifetime and be a lasting legacy for the families of the partners.