3 Reasons to Have a Business Succession Plan

When the leader of a large Fortune 500 company exits the business due to retirement, disability, financial hardship, or death, a plan exists to ensure day-to-day operations will continue without a hitch. But in a small business, when no succession plan exists, the departure of an owner can be disastrous.

Few people look forward to thinking about their own death or disability, but it’s a necessary part of small business succession planning. Entrepreneurs must be able to envision worst-case scenarios, as well as the day when they may eventually want someone else to take over their business. If you don’t have a succession plan, here are three reasons to make one:

  1. You want your family to control the business. A family business does not automatically transfer to the closest next-of-kin when a business owner dies. Especially when there are other stakeholders in the business, other owners, and loans to repay, the transfer of interest in a family business can be quite complicated. And this type of transfer may trigger burdensome taxes for surviving family members.

Your succession plan should be developed in conjunction with your estate plan to ensure financial considerations are accounted for. In some families, a business owner also wants a specific person to control operations, which is a stipulation that can be included in your long-term planning. And your family could still retain a stake in the business without actually managing it, or without participating in daily operations.

  1. You want the freedom to leave. If you have business partners and no succession plan, you may have no legal claim to compensation for your investment, should you choose to retire or give up your share of the business.

A succession plan includes language about how a partner will be compensated upon exiting the business, and that generally requires the business to be setting aside funds for this scenario. The succession plan may also require remaining owners to continue paying compensation to the retiree.

  1. You want the freedom to sell. Occasionally, larger businesses will offer to buy-out a smaller business, but co-owners of small businesses may disagree about whether a buyout is amenable. In your succession planning, include provisions about what will happen if your company receives a buyout offer.

Other Considerations

A succession plan can account for a number of circumstances – for example, whether to rebuild after a natural disaster wipes out your business, how partners will handle business bankruptcy, and what happens if a partner violates terms of any legal agreement. Business owners may be unable to envision on their own all the possible reasons they might need a succession plan, but an experienced business law attorney can help entrepreneurs prepare for those eventualities. And when developed alongside estate plans, business owners can help provide for their families and protect them from legal and tax burdens, in the event of their demise.

The best time to create a succession plan is when you’re establishing your business. But if you have an existing business and no succession plan, it’s not too late to make one now.

Lusk Law, LLC, specializes in assisting small business owners, helping to avoid litigation when possible, and we’re ready to actively represent our clients in court when litigation is necessary. Our experienced attorneys have provided legal counsel and representation to entrepreneurs in Frederick County, Howard County, Baltimore County, Baltimore City, Carroll County, Washington County, and Anne Arundel County, and other counties in Maryland. We’re ready to offer a consultation concerning your rights. Please call us at 443-535-9715 or fill out our contact form if you have any questions about this topic.

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