Every good business owner knows the importance of planning for the future. However, not everyone considers what may happen to their company in the event of a serious injury, retirement, death, or other major life events. Without adequate preparation, the fate of your business could be at risk. But business succession planning offers a solution.
The right business succession plan will give peace of mind to you, your family, and your organization by clarifying who takes over the company in the event something happens to its leadership. SederLaw’s Business and Corporate Law attorneys can work with you to create a plan that fits your company.
Why Should My Business Adopt a Succession Plan?
Life could change in the blink of an eye. A business owner, partner, or executive could get sick, become seriously injured, or die. These and other top employees may be in a major accident that leaves them incapacitated. And if none of these scenarios come to pass, then you know these members of your organization will eventually retire or leave the company.
The question is: who takes over the business at that point? No matter how it happens, the loss of someone significant could spell trouble. A business partner may have been in sensitive contract negotiations at the time of death, for instance. If there’s no clear plan on who succeeds that person’s position, your company could be facing internal strife, reduced productivity and revenue, and maybe even lawsuits.
This is where a business succession plan comes in. A comprehensive and detailed plan will cover all possible exigencies and set forth a clear transition plan from old to new leadership. On top of that, a good plan provides reassurance to investors and other stakeholders by letting them know you’re ready for what may come down the road.
What to Include in Your Business Succession Plan
No two business succession plans are alike. The one your company adopts must take into account its unique circumstances and values. However, most plans contain the following:
Procedure for selecting the successor. Your plan should lay out how exactly the departing owner, partner, or executive will be replaced. Criteria for this selection process can be included. For instance, what traits, skills, or experience should the successor have?
Transition guidelines. When a company undergoes a major change, it enters into a vulnerable position. It will therefore be important to set up guidelines for how this transition phase will be managed. As an example, you will want to specify who is in charge of the process and perhaps name a temporary replacement who can fill in for whoever left.
Exit strategy. If someone is planning to leave your company, this affords you the chance to get ready. The most important members of a business should not just walk away without an exit strategy. And, practically speaking, they probably can’t. Most owners, for example, are invested in the business or have interests tied up in it. An exit strategy can facilitate the departure of an owner or other employee on terms that are agreeable to everyone.
Buy-sell agreements. Whoever is planning to leave your business wants to receive fair value for parting with his or her stake in the company. A buy-sell agreement can do this by specifying when an owner or other member can sell his or her interest, on what terms, and for what price. It can also dictate who can buy the interest.
Business valuation. A well-developed business succession plan will include a process for conducting a valuation of the company. There are different approaches you could choose from such as asset, income, and market valuations. The point is to protect the individual who is leaving the business while minimizing the risk of legal problems for those who stay.
Non-compete, confidentiality, and other agreements. The owners, partners, and others who remain with the company should be mindful of their interests. A departing executive could set up shop and start competing directly with your business. A non-compete and confidentiality agreement could restrict that person’s ability to do so while protecting trade secrets and other intellectual property rights.
What Are the Goals?
As you develop the best plan for your business, keep in mind these objectives:
Preventing internal disputes. The last thing you need after an owner or other significant member leaves is a power struggle. Your succession plan should leave no question as to who will assume authority and what the transition will look like.
Securing your essential employees. When one person leaves a company, there’s a tendency for others to consider doing the same. Your plan may want to offer incentives to prevent this from happening. If these individuals decide to leave anyway, your plan should address how to protect business assets (e.g. trade secrets) from being misappropriated.
Reassuring your stakeholders. Investors, the community at large, and other key stakeholders usually have more confidence in businesses that have signaled their intent to prepare for the future. Adopting a carefully designed succession plan is a great way to reassure them.
Preserving institutional memory. The arrival of someone new in your organization, no matter how prudent the process was to select that person, will necessarily change the culture of your company. But you may have certain traditions and ways of doing business you want to protect. Your plan can help do this.
Reducing stress. Adopting a business succession plan gives you and others in your company peace of mind. This, in turn, reduces stress and keeps your business focused.
Contact Our Westborough Business Succession Planning Attorney
If you’re ready to take steps to help your business adapt to life’s inevitable changes, then a business succession plan is right for you. Don’t leave your company exposed because it wasn’t ready for someone’s death, incapacity, or other departure. Connect with SederLaw’s Business and Corporate Law team today.