Succession Planning Issues for Businesses

Succession planning is crucial for the longevity and stability of any closely held business. At the heart of an effective succession plan is open and honest communication among the business owners. Once the owners align their personal and business goals, these plans need to be documented in a clearly written agreement. 

In this blog, David Rodriguez, founder and partner of Richards Rodriguez & Skeith will outline what you should expect when succession planning.  

Key Components of a Succession Plan

1. Owner Agreement: All owners must agree on the succession plan, which should be formalized in a written document.

2. Spousal Acknowledgment: If any owner is married, their spouse must also acknowledge and agree to the plan, particularly regarding the handling of the owner’s equity if certain events occur.

3. Equity Transfer Mechanism: The plan should include a mechanism allowing the other owners or the company to purchase the equity at fair market value in the event of certain triggers. This prevents unwanted third-party ownership and ensures continuity.

Potential Triggers for Succession

A comprehensive succession plan should address several common events that can impact ownership: 

Death

Without a plan, the equity of a deceased owner may pass to someone with no interest in the business. Most owners prefer not to have a surviving spouse or heirs as co-owners. 

Divorce

Divorce can introduce a potentially disgruntled ex-spouse into the business. Both owners and their spouses should seek legal counsel to understand the implications of a divorce on business ownership. 

Disability

If an owner becomes disabled and unable to participate in business operations, the remaining owners should have the option to buy out the disabled owner’s equity at fair market value. This ensures the remaining owners are not burdened with additional responsibilities without appropriate compensation. 

Disagreement

Disputes among owners can disrupt business operations. The succession plan should include a dispute resolution process, requiring owners to negotiate in good faith. If disagreements persist, the plan should outline a buyout process for the dissenting owner. 

Distress

Financial difficulties can lead to insolvency proceedings. Other owners will want to avoid having a bankruptcy trustee or creditor influence the company’s operations. The plan should provide a strategy to handle ownership changes in such scenarios. 

Read Our Blog: An Actual Business Lesson from HBO’s Succession  

Consequences of Not Having a Succession Plan

Without a clearly written and agreed-upon succession plan, closely held businesses risk having third parties gain ownership or control. This scenario is typically unworkable for the remaining owners and can lead to financial harm or even the dissolution of the business. A robust succession plan is essential for maintaining the stability and success of the business through unforeseen events. 

Succession planning is not just about preparing for the inevitable but about ensuring that the business remains in capable hands. By addressing critical events and creating a structured plan, business owners can safeguard their company’s future, maintain control, and ensure continued success. 

By proactively planning for these eventualities, closely held businesses can navigate transitions smoothly, ensuring the longevity and health of the enterprise. 

If you own a family business, an impartial party is ideal when succession planning. The business attorneys at Richards Rodriguez & Skeith can assist you in making critical choices for the future of your business. Contact us today and secure the future of your business and family.