The Crucial Step of Succession Planning

When a business owner starts a business, they rarely think that someday they may want to, or may have to, leave that business. They may decide to move to another part of the country, or they may want to retire, or the business does not excite them anymore. The business owner can also become ill or die. Though this may seem like negative thinking—it is necessary thinking when you have the responsibility of owning a business. The time to plan for succession in that business is at least five years prior to the owner’s date of exit. Since in many cases, no one knows when the owner will exit, especially in the case of health issues, this topic needs to be part of the business’ ongoing strategic planning. For the purpose of this article, we will focus on the involuntary exit of a business owner.

Generally, the largest asset that is owned by a business owner is their business. If the owner fails to have a plan in place, that owner is showing a lack of care for their spouse, their family, and their team. The owner is allowing all those people to fend for themselves should something happen to them. They also allow for the competition to come in and take all the customers making it difficult if not impossible for the business to survive at all.

Until the owner has a full succession plan in place, there are some simple things to consider as part of such a plan in the event of an involuntary exit. If the owner is the sole owner, one question is whether the business would have to be sold. If the answer is yes, then the owner should consider the best potential buyers that should be approached by the owner’s representative to make some sort of deal to sell the book of business and/or the equipment used in the business. This move will not maximize what the owner’s family would get from the business, but it will be better than liquidation value.

If the owner is a partner with one or more partners, the question is whether the other owner or owners would be able to run the entire business or hire in additional talent to do the job of the departed business owner. If they can run that business, it is time to have a good shareholder agreement or an operating agreement that obligates them to buy out the departing owner’s share. The owners will have to devise a formula in determining the value of the business and determine how the payments will be made. The owners may purchase life insurance to cover a portion or all of the buyout, for the protection of the departing owner’s family.

Many times, in a family business, some of the managerial team are family members and others are not. One consideration is whether the family members would be able to step up to run the business. Sometimes, they are not capable of doing the owner’s job, or do not want to. If the family members are not the right fit, would other non-family team members be able to either buy or at least, run the business until the right buyer for the company can be located?

Of course, there are more details and things to consider, but having a game plan for the involuntary exit of a business owner is a start in the right direction to preserving the company’s value, to protect the owner’s family, and showing the business’s team that the owner is providing a game plan if the worst happens. The business owner should document this part of the plan with their business lawyer, as well as with their estate lawyer. The owner may change this plan over time as their business changes and the participants in the business change, but at least the worst-case scenario is covered for now. If you haven’t started this process yet, you may want to move it to the top of your ‘to-do’ list.

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Denice Gierach

Gierach Law Firm

Denice Gierach is an attorney, CPA, Northwestern University business master's graduate, and has owned several businesses from real estate to manufacturing. She is the lead attorney at Gierach Law Firm in the Chicago area. With more than 30 years of experience, she has been a respected and sought-after resource for businesses looking to grow, sell, solve problems, and succeed long term. Her insights across business areas gives a fuller lens to business issues and solutions, and helps businesses grow and succeed with less time spent on legal issues and other time-consuming problems.

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