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Berge & Berge, LLP Blog

Monday, November 20, 2017

I Own a Small Company - Do I Need a Business Succession Plan?

As a small business owner, no doubt planning and foresight are critical to your success.  So after you’ve spent an entire career building your business by carefully preparing for every possible contingency, why would you change course at the end and leave the future of your business up to fate?  A good business succession plan will allow you to maximize the value of your business and assure its successful transition into the next generation’s hands.

How Do I Create a Succession Plan?

The first and most critical step in creating a business succession plan is to identify and clearly state all of your goals for the plan.  What is important to you as you hand over control of the business you’ve worked so hard to maintain?  Do you want to be sure your business remains in the family?  Do you want to see it continue to grow, or would you be just as happy allowing it to wind down in the future?  Have you established a brand that you want to continue on as your legacy?  Taking the time to articulate and write down what you are hoping to accomplish with a succession plan will set you on the right path to creating a successful plan.

What Considerations Should Go into a Succession Plan?

Although any business succession plan needs to be tailored to the nature and needs of the business, there are several topics that all plans should address.

Successor

Determining and communicating early on who will take over your business after you leave ensures everyone understands your intentions and allows them to make appropriate preparations.  For many family businesses, passing control to a family member is important.  For other small businesses, identifying a suitable candidate from within the company ranks feels right.  Regardless of the nature of your business, however, making this decision as early as possible helps to ensure a successful transition.

Training

One of the drawbacks of passing control of a business to a family member or current employee is that the pool of candidates is necessarily limited.  After a successor has been identified, a strategy for providing him or her with the opportunities to develop the skills necessary to take over must be created.  

Timetable

A succession plan should also establish a timeline for the transition of power within the company.  Will the successor gradually take over more and more elements of the business, or will you maintain control until it’s time to move on?  A detailed timetable allows you and your successor to make adequate preparations and avoid surprises as the time for transition approaches.

Method

Your plan should absolutely include details regarding how the actual transfer of your interest in the business will take place.  Businesses can be sold to the successor at the time of transition, or sales agreements can be worked out years in advance and conditioned upon events such as the predecessor’s retirement.  For some family businesses, a trust fund such as a Granter Retained Annuity Trust or GRAT can be the most helpful instrument to transfer the business in a way that accomplishes the goals they have set.  There are many options available, so it is helpful to have advice from an experienced business attorney when making these arrangements.

Unexpected Succession

Finally, business succession plans should have contingency plans for scenarios in which the business owner is suddenly unable to perform his or her duties, such as a serious illness or untimely death.  Will the successor be ready to step into the leadership role immediately, or would it be more appropriate to have an interim period to get him or her up to speed?Hopefully these plans will never be needed, but it is always better to be prepared just in case they are.

Transitioning leadership of a small business from one generation to the next can be a precarious time for any company, but with proper planning the change should go smoothly.  Our firm has helped hundreds of small businesses and family enterprises make succession plans, and our attorneys are available to help you craft a plan of your own.  If you have questions about business succession planning and would like to speak with an attorney, contact the Law Offices of Berge & Berge today.

 


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