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Business succession planning is top of mind as the Baby Boomer generation retires. From a legal perspective, it’s essential to navigate the process carefully to avoid potential pitfalls, streamline transition and secure the future of the business, both in times of planned and unplanned transition.
Here are ten considerations when it comes to planning for your business:
1. Start Early as It’s Not Only About Retirement
It truly is never too early to start the process. You need ample time to identify objectives, build towards monetary goals, strategize for continuity in times of crises and consider all legal aspects, including tax implications and regulatory requirements. Delaying the process can leave a business vulnerable to unforeseen events, including sudden incapacity of a key player or a paralyzing outside factor.
2. Incorporate Buy-Sell Agreements
Ensure that you implement appropriate agreements and clauses, which outline the process for transferring control or ownership interests. These should cover scenarios such as retirement, disability, or death, and detail valuation methods and funding mechanisms. They can also address power of attorney and other rights necessary to continue operations or wind down the business.
3. Identify Monetary Goals
A common point of contention is the difference in what a business owner wants to make versus what is realistic based on value of the business. By identifying goals early on and then cross-referencing them against objective data, you can work with your team of advisors to identify holes in your plan and strategize for making up ground.
4. Fund the Succession Plan
Without proper funding mechanisms, such as life insurance or a sinking fund, implementing a plan can be financially challenging. Work with legal and financial advisors to understand and plan for the tax consequences of succession. Strategies such as gifting shares or creating trusts can be effective in tax planning.
5. Identify Assets
Identify assets and confidential information annually to streamline the other considerations we address. What qualifies as an asset is often misunderstood and, good news, is typically much broader than commonly thought of – i.e. digital assets, intangible public perspective, and various intellectual property. By having those discussions early on, which should be protected as confidential information, the succession planning framework moves from theoretical to substantive. Additionally, the confidentiality documents you put in place can also prevent unnecessary speculation and instability within the company.
6. Involve Key Stakeholders
Often key players are valued in a similar way to assets, yet it isn’t quite as straightforward to ensure their transfer. Consider the perspective of family members, key employees, and advisors in the process to build consensus around the process and provide for their continued involvement and investment in the business.
For the remaining Top 10, click here
Kyle Willems and Wynne Reece are shareholders with the law firm Bassford Remele. Kyle focuses on business litigation and trial work. Wynne focuses on outside corporate counsel support, IP and M&A. kwillems@bassford.com; wreece@bassford.com.
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