Succession Planning

Business succession planning: The crucial handoff

I would hazard a guess that any seventh grader could easily explain the importance and wisdom of having a plan ready at the time of your death. What is much less well known is how equally important it is to prepare similar arrangements to safeguard business or professional assets in the event of one’s death. Simply put, Business Succession Planning is a method by which a person creates a plan to disperse or transfer business assets from him or herself to another party. When examined on a fundamental level, it is easy to understand the importance of why a person would want to create a succession plan for his or her business, but there are some other benefits that sometimes go overlooked when deciding whether or not to include one in their wealth management plan.

Benefits of business succession planning
Of the numerous benefits that crafting and having a business succession plan can provide, for the sake of this article we will concentrate on what I view as the three most important. First, business succession planning allows for the assurance of a mutually agreed-upon price for the deceased partner’s share. Second, business succession planning allows for the ability to purchase the deceased member’s share quickly and with no liquidity. Lastly, succession planning allows for the timely settlement of a deceased partner’s share of the business with as little effect on the business as is possible. Ultimately, what these benefits amount to is peace of mind for you and your business. But to get started, one must invest some time and serious thought to decide on the strategy that best suits your needs.

Business succession planning strategies
The options for succession strategies are numerous with varying benefits and circumstances, oftentimes being stretched out over years to allow for proper planning and implementation. One strategy that seems particularly popular would be for the business to purchase life insurance on the owners or partners and naming the business and or other partners as the beneficiary. This is useful because it is a strategy that actively seeks to avoid messy or complicated probate claims or auction which should allow for the business to proceed and function without interruption. A variation of this strategy, known commonly as a Buy-Sell Agreement, is very popular among financial planners as one of its purposes is to ensure that after a triggering event (like the loss of an owner) that there will be enough capital to secure the remaining shares in this arrangement. Other variations might also be known as Entity-Purchase agreements,  which typically use life insurance policies as a basis for these arrangements.

Choosing your successor
The process of selecting a suitable successor for your business can be a simple matter if you have a family business or it can be a very complicated one if the owner or partner does not have close family or relatives who would be willing to take over in their absence. For other types of businesses, other considerations might also include future growth and expansion for the business, time frame for these changes to be implemented, as well as the creation or strengthening of fundamental foundations within the business to avoid the trap of having too many systems reliant upon a single individual.

The process for choosing a suitable successor is by no means a science and will still rely heavily upon the judgement of the person/people making the selection, but generally there are five fairly common practices involved in these decisions that may be helpful during this selection process. The first step is usually deciding upon a timetable for the implementation of this succession plan. It should not only be thought of in terms of “when I retire” or “after I’ve passed away” but a careful decision should also include when to begin, the amount of time you plan on devoting to this process, and at the time it will take to complete the transition after the triggering event. Once you have settled on these, it then becomes important to audit your position within the company and create a comprehensive list of competencies that would be required to replace you. You will find that this list will aid you in the next step of the process, which is ordinarily the creation of metrics to measure your successor’s pace and progress towards those skills. Though not simple, the previous steps are likely easier to complete than selecting a candidate or candidates. When selecting, it is obviously important to use the metrics and competencies from the previous steps, but other considerations are required to ensure that you are making the most appropriate selection for your company.

One of the most popular comments a person creating a will will say during the process is that they want to distribute their assets equally amongst their heirs. This is also a very popular thing to say for individuals looking to create a succession plan. The problem, of course, is that equal is not always fair and should figure prominently in your final choice. Although not at all exclusive, this tends to be an issue in family businesses where siblings might choose to invest their time and studies outside of the family business versus some who may choose to apprentice and learn the business. An equal share of the business does not include an equal amount of interest or dedication so being candid during this part of the process is especially important.

Again, it cannot be mentioned enough: the most important thing to remember about choosing a successor is that you are under no obligation to give your business away until you are absolutely certain that it will be taken care of.

Bulletproof your corporate documents
One of the more important items to address is making sure that all operation, partnership and/or shareholder agreements are water tight and dictate exactly what should happen to the business when an owner passes away. Explicit instructions in the form of well-planned business documentation means that upon an owner’s death, there will be no room for interpretation, thus protecting the wishes of the deceased. These agreements should all include language that states that a business does not dissolve upon the death of the owner, but instead advances an alternative result. Other considerations when examining your corporate documents is the ability to dictate the value of the company, insurance provisions, all the details of these agreements as well as the plan for succession. For many, especially those who have been in business for several years or more, it is strongly encouraged that a specialist like an estate planning or asset protection attorney be consulted to ensure the synchronicity in all your personal and business documentation.Since financial protection will very likely not be your only goal, it is imperative to coordinate your tax, estate planning, and investment goals into a financial plan that suits your needs and will still allow you to attain your goals.

Reference your succession planning in your estate planning
Your personal estate plan should look to be consistent and hearken back to the provisions set forth in your business operating, partnership and/or shareholder agreements as well as your business succession plan agreement. This is an important step in avoiding contradictions between your personal estate and business estate plans at the time of your death. It is therefor important to realize that just as there are hundreds, or perhaps thousands of types of businesses today, there are equally as many considerations and customizations that require accuracy in their crafting and precision in their implementation. Although it is possible to complete this step individually if great care and attention to detail is paid, an attorney should be able to help ensure that all of your business and personal estate planning documents remain in consensus throughout this process.

Asset protection plan
It bears mentioning however, that a business succession plan is only really useful in conjunction with a comprehensive Asset Protection plan. Business succession generally exist as part of an estate plan that makes many of the arrangements and decisions at the time of your death, but in life, it is just as important to protect your current assets and future earnings as part of your wealth management plan.

Essentially, Asset Protection is this process of providing strong safeguards against creditors during your lifetime. It was once only the wealthiest Americans that utilized the benefits of asset protection to defend their immense wealth from lawsuits, but as the world grows more and more litigious, it has become increasingly clear that any person with assets can be considered a target for the overzealous. Without strong defenses in place a person can find themselves on the wrong end of a lawsuit and even more unfortunate is the fact that once proceedings have begun against you, it is often too late to create and utilize an Asset Protection plan.

There are no universal steps or strategies to title or encumber your savings, property, business and other assets against lawsuits. Each individual has specific tax considerations, assets, and investments that will influence which methodology will be the most effective at protecting their business and personal wealth. If you are just beginning this process or looking to bolster your already prepared defenses, there is a great deal of free information available in print and media that may aid in this, however we always encourage those who are interested in setting up their financial defenses to speak with a professional (many of whom will offer complimentary consultations) when evaluating current or future asset protection planning.

No matter whether you are the departing or succeeding owner, it is crucial that you protect your business interests. Many people disregard the danger a single lawsuit can have upon their business, and in some cases it is enough to alter or destroy a business succession plan. We always encourage the use of an Asset Protection Plan to ensure that new or future business assets remain intact for future generations and as with many things, proactive planning is the key to keeping your business protected over multiple successions.

Category: Succession Planning

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About the Author: Hillel Presser

Hillel L. Presser, Esq., MBA
represents individuals and businesses in connection with the establishment of comprehensive asset protection plans that incorporate both domestic and internationa

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