Six people at a business meeting

Business Succession Planning

The owner of a successful construction business with 90 employees and $50 million in revenues, died unexpectedly at age 45. His spouse, who was engaged in raising two young children and the practice of her own profession, knew nothing about the business. Key employees on whom the business owner once relied filed suit against the estate claiming unfulfilled promises of equity interests in the business. At the same time they started their own businesses to compete with their former employer, taking much of the intellectual property, human capital, and customer base with them. The surviving spouse was facing the liquidation of a once thriving and valuable business.

Could this happen to you? These problems could have been avoided. A properly designed and implemented succession plan would have created the structure for the surviving spouse where her team of trusted advisors and key employees would have continued to operate the business or successfully transition it to new ownership while maximizing the business’s value.

Family-owned businesses range from proverbial “mom and pop” retail operations, to knowledge- and skill-intensive service companies, to multimillion-dollar manufacturing and technology enterprises. They all share the need to establish a plan for succession of ownership and control of the business. Most often, the interest in a small business is the major asset in the estate of a shareholder, partner, or member. When family businesses fail to pass to succeeding generations, a substantial portion of the value of the business may be lost, and the future support of the retired owner or the surviving spouse and other family members may be jeopardized.

The impetus for seeking a business succession plan may arise from many sources, including the following:

  • A business owner begins planning for his or her retirement and realizes that the best chance of obtaining the maximum value for the business is to sell the business to a group of heirs and/or key employees who have a vested interest in continuing to operate it;
  • A personal experience, e.g., the small business owner has a heart attack, other major medical issues arise within the family, or a friend dies;
  • A competitor or supplier offers to buy out the business;
    Key employees become concerned about their future in the business; or
  • Professional advice from an estate planning attorney during the process of preparing wills and trusts.

The actual succession plan will be highly dependent on your objectives, the nature of the business, the people involved, competition, and other market conditions. The optimum plan may include a buy-sell agreement(s), agreed method for valuation, life insurance, liquidation, sale on the open market, divesture of selected assets, etc. Or possibly bring in a strategic investor who may contribute additional capital and management expertise. The possibilities are endless and there will be an optimal solution if you sit down and grapple with the issue while you are still alive and have options.