The long-term survival of a business depends on the strength of its leadership. When that leadership is weakened due to the retirement, illness, incapacity, or death of one of its key people, the ongoing viability of the business is placed at risk until a suitable replacement is put into place. Businesses large and small can avoid this shock to their system by working with a competent attorney to create a succession plan.
Understanding the Problem
Upon the death, for instance, of a business principal without a succession plan in place, her interest in the business will generally go to her beneficiaries as part of her estate, be taken over by the remaining stakeholders, or some combination of these two options. This process can be detrimental to the ongoing viability of the business for several reasons.
In the case of a family-owned business, disputes can arise between the beneficiaries who are actively involved in running the business and those who aren’t. In the former case, beneficiaries who are up to their elbows in running the business rightfully expect that their contribution to the success of the business should justify a greater portion of an interest in the business. In the latter, beneficiaries who have a more hands-off approach have similarly correct expectations that their share of the business principal’s estate should depend on their equivalent status as heirs, and not on their involvement in the business. This is particularly true when, as is often the case in such situations, the family business comprises the bulk of the estate.
In the context of a larger corporation, other problems arise. In the absence of the strong principal, both clients and key employees, fearing instability, may part ways with the corporation. Shareholders may be unable or unwilling to buy out the shares, leading to a continuing vacuum. If a spouse or other relative with no prior experience with the business inherits the shares, disputes between the shareholders may crop up, extending the period of instability until it may be too late for the corporation to recover.
Planning for a Solution
Fortunately, just because these problems can surface doesn’t mean they must surface. With the assistance of a lawyer with experience in estate and business succession planning, business stakeholders can prepare for a smooth transition in the event of a leader’s retirement, incapacity, or death. The process involves careful consultation with other shareholders, coworkers, family members, and anybody else who has a significant interest in the business. Whether the end product results in some sort of retention planning, where family members retain a controlling interest in the business, or a buy-sell agreement where other shareholders are given the opportunity to purchase the shares, it should provide a clear roadmap to guide the future of the company following the leader’s departure.
Simply creating the plan, though, is insufficient. It usually requires additional steps to prepare for the leader’s eventual departure, which would include providing the necessary training for any successors, instituting retirement accounts, purchasing life insurance policies to fund the purchase of shares (by surviving shareholders) or to provide equal treatment to all beneficiaries (such as non-participating children), etc. In some cases, it may make more sense to sell the business outright, and invest or divide the proceeds accordingly.
Given all the competing factors, you should seek the advice of competent counsel who has the expertise to guide you through this process. I would be happy to help you with your business succession planning needs. If you have questions regarding your specific situation, please email me at firstname.lastname@example.org or call (703) 574-0425 to schedule a visit.