When business owners die without estate or succession plans, chaos ensues as family members clash over leadership decisions and determining the direction of the business. Even the closest families can quickly descend into a battlefield of hurt feelings, endless arguments and faction-building, according to the article “How to Make Your Business Outlive You” from next avenue.
Family disagreements often escalate into legal disputes. Lacking leadership, businesses spiral downward and often must be liquidated, leaving behind broken families with severely depleted assets.
This scenario occurs in small businesses on a regular basis. Owners with the vision and tenacity to take their ideas and create a successful enterprise are often so passionate that they can’t imagine the business without them.
A well-defined succession plan matters to more than just the family and their customers. According to the Small Business Association, businesses with less than 500 employees account for 99.9% of all firms in the U.S., 43.5% of the country’s total economic output, and just under 66% of new jobs created. A well-designed succession plan contributes to the national economy,
Having a succession plan in place protects the business and the family from unforeseen circumstances and creates a roadmap for the future. What is the best time to start? When all is well, leaders are healthy and there’s no internal drama.
Start by contemplating your legacy. How do you want your family and employees to benefit from the value created by the business? Clarifying this will drive much of what follows.
Seek professional guidance. An estate planning attorney should be one of several professionals to ensure that the plan complies with laws and regulations in your jurisdiction. You also want to be sure your business succession plan aligns with your estate plan. Otherwise, the resulting confusion could lead to prolonged difficulties and even litigation.
You’ll need a power of attorney for someone to be able to make decisions if the business owner becomes incapacitated. A buy-sell agreement establishes a fair market value for the company. Life and disability insurance policies provide financial security for the owner and key personnel.
Put it in legally enforceable documents. Discussions only go so far. Executing a formal series of documents ensures that the plan will be enforceable by a court if needed. Language should be clear, with no ambiguity, to transfer ownership and business shares.
Potential successors need to be identified. Will everyone step up to the next level if the business owner becomes incapacitated or dies? This isn’t always the best solution. Sometimes, skills override structure.
Reviewing and updating the business plan should be done as often as you update an estate plan. Whenever there is a major event in the business, review the plan to see if it is still relevant.
A succession plan is all about legacy, continuity, safeguarding a business, letting employees know they are valued and reducing volatility in the family’s future. It allows the business owner to communicate their values and vision, even if they are not present to be part of the future.
Reference: next avenue (Dec. 12, 2023) “How to Make Your Business Outlive You”