By Blake W. Kirkpatrick –
Ok, so you eat right, get a reasonable amount of sleep, maybe even exercise regularly, however,…does your business partner or key employee do the same? Maybe it is you that falls short in the health category. Either way, both scenarios point to critical reasons for having a good business succession plan if you own a business.
Small businesses often live day-to-day or month-to-month. Even healthy businesses only have a small amount in reserve for that rainy day that comes with the death, disability, retirement or exit of a partner or key employee. A common statement of business owners about business succession planning is “I don’t have time to deal with this right now while I am trying to bring in revenue.” If you think about it however, by saying you do not have time to plan for the future, are you really making a statement about the viability of the company itself?
Most small businesses last for only one, maybe at most two, generations. Aside from statistics that prove this, evidence of this can sometimes be seen in a company’s advertising as well. “Serving SW Florida for over 30 years” may sound great, but how many companies can really say “proudly serving for over 100 years?” If the lifespan of a company wasn’t important or even considered an asset in and of itself, why would companies advertise the concept?
So how do you plan for transition of your business?
Good business succession planning generally involves addressing a couple of key concepts and considerations (note, while some of this many allude to legal and financial concepts, these are mainly business issues):
1. Prepare for the minimization of business interruption as a result of an exit event of a partner, key employee, etc.
2. Make sure there is a financial plan for retirement or something in place that will provide for you or your family when you are no longer able to work. If the continuation of the business is vital to providing for your retirement, then it is critical to adequately address the continuation of the business.
3. Make sure that there are financial resources available to pay for the above without crippling the cash flow of the business.
4. Make sure more than one person knows how to do each job, etc. (by way of example: The NBA playoffs just ended. Players from both finalist’s benches were instrumental to their team’s success. If basketball teams have good reserves who know how to run the offense in case a starting player fouls out or “exits” the game, shouldn’t your business ensure that if a key person makes an exit, that the business will not fail as a result?)
5. Back up vital information and make sure it is handy. Employee manuals and procedures can actually be a key part of business succession planning.
6. Some important questions to consider:
a. “Do I know who my business partner will be when my current one “exits” the company?”
b. “Will may business partner be fair to me or my family if I exit the company?”
c. Who will do (insert vital role) if (insert name here) is no longer around?
d. Can my business partner’s or my creditors take control of our ownership interests?
e. What happens if an owner gets divorced?
f. What happens if an owner or key employee becomes disabled and can no longer work in the business?
One of the best TV programs to see the issues of business succession planning on full display is Deadliest Catch. Every episode is chock full of business succession planning issues, such as who the next captain of the boat will be or who can replace the key deck boss if he goes down to an injury? One season even featured the death of a beloved captain leaving his two sons left to work out their issues either on another boat or off the boat altogether. Either way, the keys to the boat and the control of crab fishing business were not simply handed over when the boat captain passed.
Now for some ideas on how to start
addressing the issues:
1. Consider an exit or transition agreement (often referred to as a buy-sell agreement or a cross purchase and redemption agreement).
2. Consider the purchase of both disability and life insurance. I do not sell insurance or receive any benefit from this plug, but if there was ever a need for insurance, it is in this area. It is also generally the easiest and least expensive to obtain, especially in the business context.
3. Start making lists of all of the “jobs” and “responsibilities” of the people in your company.
4. Begin talking through the issues with your co-owners and make the review of the business succession plan part of the annual meeting.
5. Once the business succession plan is in place, make sure that the estate plans of each owner reflect or address the plan.
Having a solid business succession plan in place will be further evidence that your company is not planning on going out of business anytime soon and that the company is healthy and on solid footing.
This Article does not constitute legal advice and may not be relied upon as such. Each individual’s facts and circumstances are different. If you have any questions regarding your particular situation, please consult with legal counsel.
Salvatori, Wood & Buckel