Here are the Top 4 Legal Considerations of a Business Succession Plan
The time for a succession plan is not when something happens to affect your business. The time to plan is before anything happens.
Imagine finding out that your business partner has suddenly died. The shock and grief alone would be overwhelming. But you also have your company and its employees to consider. Questions start coming up about the company and its future, finances, and ownership. Do you have a plan if tragedy strikes your business?
Business succession planning answers the question, what happens now?
It is the process of planning and legally determining what happens when a business owner and/or partner passes away, retires, or suddenly leaves. One day, it’s business as usual and the next day your world has changed. When this happens, it is important to have a succession plan already in place. It needs to clearly lay out how your business will function, and it needs to be crafted by an attorney with experience in both the legal and business matters involved.
Here are the Top 4 Legal Considerations of a Business Succession Plan
#1: Identify a Successor
Who’s in charge? The answer to this question is vital because someone needs to continue the operations of the company. You need to identify the person who will have the legal authority and adequate qualifications to make decisions and sign legal and financial documents. You need to consider your current business structure and determine how the company will handle the rights of the deceased’s legal heirs and just what ownership rights will pass to them. In addition, you need to make sure the person wants the job!
#2: Business Ownership and Structure
The structure of the business affects how a succession plan is determined. A closely held company is different from one with a board of directors and shareholders. Your lawyer can guide you through the several possible options and requirements. For example:
1) Will the company be sold?
2) Which ownership rights will pass to the legal heirs?
3) Will the heirs only receive the financial value of their newly inherited ownership, or will they also receive voting and management rights?
With these contingencies planned and determined in advance, you can avoid fighting and lengthy legal battles. If not, you or a surviving partner can find yourself working with someone you don’t know or trust with no experience in the business.
#3: Finances
A company’s finances go beyond the money coming in and going out of the company. That is certainly important, but you also need to consider the company’s debt. Who owns the responsibility for the debt? Is it funded through a bank or personal financing? Are payroll and taxes being paid and kept current? It is important to know in detail both the revenue structure and the conditions of financing. You don’t want to find out that open lines of credit or financing are canceled, and all debts are due if a partner passes away. You need to be working with a legal professional who can put the processes in place to protect both the company’s and your finances.
#4: Key Man Insurance
You are familiar with life insurance. You may have it to help take care of your loved ones. A Key Man Insurance Policy protects the company in the event of the death or inability to work of the “key man or woman” that is insured. The company pays the policy premium and is the beneficiary of the money. This money can be used to buttress up the company’s financial health and can be used for things like hiring an interim executive or fund an employee search to replace the deceased partner; effectively keeping your business financially operational. A business succession plan safeguards your business against loss and collapse. Without a plan, your business could struggle to maintain continuity and growth. You need to work with an impartial, experienced, legal professional to develop the plan.If you find yourself needing an attorney for Succession Planning, contact our firm. (757)