Bite-Sized Bits of Knowledge

The Importance of Business Succession Planning

Why Every Business Owner Needs a Succession Plan and How It Can Protect Your Legacy

As a business owner, you spend countless hours and resources building your business. However, what happens when you are no longer able to run it?

One of the most important parts of your business plan is succession planning. Succession planning will ensure the legacy you’ve built for your business will transition smoothly and not decrease in value.

Succession planning involves addressing critical components of your business should life’s uncertainties – such as death or disability – arise. Business owners should carefully plan family involvement, tax implications, and business processes.

In this post, you will learn the importance of having operating and shareholder agreements and bylaws which will influence succession planning.

What Is Succession Planning?

While estate planning protects your personal assets, including some aspects of your business, succession planning focuses exclusively on safeguarding the continued operation of your business when you are no longer running it.

Specifically, good succession planning outlines how the business will operate in the event of your death or disability by identifying who will fill in key roles and how responsibilities, assets, and ownership will be divided up for a smooth transition.

Even if you do not own a business but instead have shares in a large corporation, it is beneficial to understand how the company’s succession plan might affect you and what you can do to further plan for that eventuality.

Read Transcript
Hi, thanks for tuning into another dose of Bite-Size Bits of Knowledge, where we give you meaningful information in a short amount of time. Today, we’re going to start talking about succession planning, business succession planning, and what it means and why should you care.

So what is succession planning? Succession planning is when you want your business to continue beyond life’s uncertainties, for example, death and disability. If you pass away and you own your business or you’re a key person in your business, you now have probably, if it’s owned in your name, you have a personal representative or executive who’s now in the driver’s seat, and it’s not a quick process to get that person in the driver’s seat.

So there’s a holdup here. The business will probably slow down to a halt while there’s a scramble to figure out management. While your business is stuck in this process, it’s slowing down, ownership is unclear, management is possibly unclear. Your purchase price is low, very low. In fact, this is sometimes what we refer to as a fire sale situation where you have a family inheriting a business or parts of a family or spouse of a family inheriting a business and just doesn’t want it, doesn’t know anything about it, doesn’t care, just give me some money and I’ll move on.

Usually that happens in what’s called a fire sale, meaning pretty much the lowest price possible that a buyer is willing to pay for it. It’s good for the buyer. It’s not good for the estate. So if this is something that would bother you, then you should pay attention to this stuff. The same can apply to disability. If you have a disability, you can’t work anymore. Whether you have insurance or not, doesn’t change the fact that your business probably cannot continue without you. And that’s something you’re likely to think about. So the idea here is continuity of business.

When life uncertainties happen, how is the business going to continue to operate effectively and properly without you in the game? So if you have family, do you want them to be involved? Do they want to be involved? Sometimes people are surprised that they appointed their kids to take over and their kids want nothing to do with the business. And then it blows up because that wasn’t conceptualized. That wasn’t thought about in the planning process. If maybe they don’t want to be involved or they’re not ready or they’re not willing or they’re able to be young, whatever the reason, perhaps you want to have it managed by key personnel for the benefit of your family.

How do we do that? How do we structure that so that key personnel are interested and have a vested interest in maximizing the value of the company when it’s for the benefit of other people? That’s an interesting dilemma that we solve that problem.

Timing is very important here, too. If you want to get out while you’re retired or you want to get out after you pass, there are significant tax consequences of the timing here. Timing matters, tax matters. The amount you’re giving to your family or you’re giving to whoever you want to give it to, the value of the business is dramatically impacted by when you give it to them.

There’s a whole video on the basis, tax basis. Watch that video to catch up on the basis, but it matters. Generally, you want to give things on death. That’s the rule in the current tax code environment of 5000 pages. That might go down to that one rule.

Control is also something to really think about, you know. Who do you want to be succeeding you as manager, as president, as CEO, whatever your role is? Is that person qualified? Do they know what the job entails?

Are they motivated and interested to bridge the gap for you? And then lastly, you got to think about this very granularly. You got to get under the hood, you got to understand the business, and you got to start building out systems in the same way we talked about for exit planning, you need to build out systems for succession planning if you want to make it work.

If you want this to continue rolling the way it’s been performing and operating, there needs to be something in place to make that happen. It’s just not going to happen on its own. And certainly, if you have random people stepping in to take over, I guarantee you it is not going to happen. And that business will be sold at a value far less than what you really want to be sold and the value of which goes to your family or intended beneficiary, maybe it’s charity, whatever it is, the value will be a lot lower without doing this.

So how do we do this? Well, you got to start getting involved in the people, connecting with the people, understanding what roles are important. You got to understand your family involvement, who wants to be involved, and who wants to participate in management and sucession of management.

You got to understand the business. The business has to start to become systemized. You have to have documentation of how the business runs and operates in case different people have to be brought in. I can’t over-emphasize this enough: key personnel is so important. You got to make sure that they’re buying into the vision and they’re buying into what you want them to be doing, how they’re going to do it, and they’re well compensated for doing it. There’s a lot of ways to skin a cat here.

All this is effectuated in legal documents like the operating agreements, shareholders agreements, bylaws, and so forth. Usually, we deal with trusts at the top of the business as the owner to keep it out of probate and make sure we’re streamlining the process. But there’s a lot of ways to skin a cat here, and every single business is different. They all have the same framework of issues to overcome, but every business is really different and has different challenges and different goals.

So succession part one is talking about disability, death, continuity of business, avoiding a fire sale, maximizing value that goes to your family, talking to the right people to make sure that you have everybody in place, having a system involved for the business to make sure that it’s streamlined as much as possible to minimize the disruption of your not being there.

Tax matters, timing matters, and getting under the hood is the key to moving this forward. Okay, thank you for stopping by, and stay tuned for more.

Questions to Ask as You Prepare for Succession Planning

There are a number of important questions to ask as you prepare to put together a succession plan:

  • Should my business be sold to liquidate assets? Or passed down to family or heirs?
  • Will the business continue to be lucrative over time? How can it maintain revenue?
  • Who needs to step into key roles to continue business operations?
  • What skills are needed to keep the business running effectively?
  • How will ownership and company sales be managed?

Only when you are able to answer these questions will you be able to put together a clear and comprehensive business succession plan.


When Succession and Estate Planning Converge

Estate planning is more of an umbrella approach, with multiple legal considerations. In contrast, succession planning is solely about how your business will continue operating after you pass.

In what circumstances would you use both? If you have a family business you would definitely want to have a reliable advisor or attorney help you build a comprehensive estate and succession plan.

You might want to divide ownership of the business among your heirs separately from your division of personal financial assets. You may have stock that needs to be doled out to your family in a specific way. Or you may select one or a few family members to take over key roles in the business operations.

In any scenario, you’ll want to avoid any family conflicts and misunderstandings along the way that could stall distribution of your wealth or hinder the operations of your business.


What Happens When a Business Owner Dies?

So, what happens after a business partner dies in Florida?

While there are a few specific options available, here in Florida when a partner passes, unless the governing documents say otherwise or planning is in place, they are automatically disassociated from the business. When proper planning is in place, this usually happens one of three ways:

  • The deceased partner’s estate assumes ownership of their partnership stake.
  • The remaining partners pay the estate in order to facilitate a transfer of the deceased partner’s share in the business.
  • A partner can buy the decedent’s share of the business based on a financial formula.

In the unfortunate circumstance that a written partnership agreement has not been executed before the death of a partner, things may quickly become more complex. Florida’s Uniform Partnership Act will then regulate what happens next for your business (or Florida’s Revised Limited Liability Company Act).

This could expose your partnership to unanticipated effects — a risk not many business owners are interested in taking. How can you avoid this?


Keeping the Family Business in the Family

Entrepreneurs who have created any kind of family-owned business typically intend to keep it in the family, and there are a number of provisions that can be implemented to do just that.

This can involve the retention of your business shares with family members — even when your family business has grown to include partners outside of your namesake.

A succession plan can allow your willing spouse, children, or other important relatives to take control of your share of assets based on specific terms. Or it could provide for a buyout agreement in which eager family members can purchase another not-so-interested family member’s shares.

There are even arrangements in which key employees you see as family and actual family members can share the responsibility of controlling your business in your stead.

The possibilities are endless, but without an actual succession plan created under the guidance of an experienced Florida business estate planning firm, your opportunities sharply decrease and the probability of success in the next generation is much lower.


Failure to Plan for Succession

While Florida intestate law typically dictates that shares in your partnership will likely land in a family member’s lap when you pass without planning, most of the time this is too much responsibility for them.

Most business owners’ spouses and children aren’t prepared to oversee their lost loved one’s stake in a company. On the other hand, being left without a guide map can leave those who are interested in obtaining control of the business in conflict with other partners.

Whichever path you collectively wish to take, your succession plan should outline agreed-upon terms for how each partner’s estate or the remaining partners are allowed to purchase or otherwise retain a deceased partner’s interest in the business.

If you intend to pass your portion of the business on to family members or other important beneficiaries, this intention should be included in the partnership’s succession plan to avoid any confusion between your business and personal estate planning execution after you’re gone.

Want to learn more about business succession planning? For help creating a well-thought-out succession plan that incorporates the needs of yourself, your beneficiaries, and your surviving partners, reach out to Haimo Law. Our mission is to help you achieve your business estate planning goals.

Contact Haimo Law today.