The Nuts and Bolts of Succession Planning
Establishing and developing a business takes years of effort before most owners see any rewards; but once a company is on solid footing, nurturing its continued growth becomes a little easier. However, all that hard work can be quickly undone if there is no business succession plan in place. A good business succession plan contemplates what will happen in the event of the retirement, death, or disability of key executives and employees. However, business succession is about more than just putting something down in a document and forgetting about it. The key is creating a mechanism within the business that allows for the seamless transition of both ownership and operations. This is often accomplished by transitioning to key personnel or passing the torch onto the next generation of family members. A business owner’s failure to adequately address these issues can have dire consequences, including expensive litigation — or even worse, the inability to keep the business operational.
Repercussions of No Succession Plan
When an owner or shareholder dies with no succession plan in place, one of two things typically happens to his/her interest in a company (or a combination of both) the stake is passed onto relatives via the estate or is absorbed by other shareholders. These circumstances can cause instability that often manifests in the following ways, depending on the size of the business. In family businesses, lack of succession planning usually leads to bitter family conflict and/or more actively involved members demanding a greater ownership stake, which unfortunately can produce lawsuits that permanently damage family relations. In larger corporations, gaps in leadership can push clients and employees to leave out of fear and insecurity. Further, remaining shareholders may not have the resources to buy out the interest, leaving a spouse, child, or other relative who may not have the background to undertake this role with an ownership stake, potentially causing disputes and halting development. This possibility is especially true if the deceased shareholder had a management position, and the replacement is forced to navigate a volatile transition that stunts his/her ability to act.
Creating an Effective Succession Plan
These negative outcomes are avoidable with the help of an experienced business succession attorney who can assist with evaluating the goals and potential complications of various arrangements. With family businesses, the planning is preceded by discussions with family members about the appropriate roles for different individuals when shifts in management are made. In larger companies, shareholders, key employees, and coworkers should provide input on possible transition plans so goals are aligned in a reasonable manner. Options for ensuring continued operations and protection of interested parties are the execution of first-refusal rights or buy-sell agreements that would provide a buffer before a big change could occur. Additionally, decisions should be made regarding whether family members are to retain control of assets or if outside stakeholders are to be allowed to join. This is a critical point if there are concerns about the ability of other family members’ ability and/or desire to take an active role. Additionally, ensuring sufficient cash flow to pay applicable taxes and/or buy out a deceased owner’s share is another issue that needs attention, requiring a professional valuation of the business. Finally, and perhaps most critical, is effectively transmitting the owner’s/executive’s vision for the company and day-to-day duties so when succession comes, those remaining have a clear direction and blueprint to continue moving forward.
Contact a Georgia Business Succession Attorney
Succession planning is an important, but often overlooked, aspect of operations. The business attorneys at MendenFreiman understand the complications of transferring control between generations and can help you execute a plan to ensure continued success. Contact us to schedule a consultation.