Succession planning is important for businesses of all sizes. Too often, owners of small businesses erroneously believe that their business is too small to need a succession plan. Unfortunately, this can adversely affect the value of the business, any employees it may have, and the family of the business owner.
Importantly, business succession planning is not just planning for the event that the business owner dies, but also if that person becomes ill, retires, and/or becomes otherwise unable or unwilling to continue in their current position. In other words, even young business owners should have a succession plan in mind. In some cases an informal business succession plan will suffice, but for most small businesses having a comprehensive and thoughtful succession plan will save and preserve the company’s assets for many years to come.
At Pacific Northwest Law Group we encourage clients to be proactive instead of reactive when it comes to their exit plan. Unfortunately, we do occasionally receive a call from someone hoping to “end a company,” because the former owner has passed away suddenly and there is no one to carry on. As you can imagine, when this happens there is a significant opportunity lost. The opportunities for the business to keep paying employees, paying the former business owner, providing for the business owner’s family, and/or protecting the goodwill and other intangible assets of the business so that the business may be sold. At this point, people often have few options and must react to circumstances instead of working from the proactive framework designed by the business owner.
When thinking about succession planning, it is important to keep both short-term succession and long-term succession in mind. When you think about short-term or “continuity” succession, you think about what people might be able to pick up the reins at your business and keep the company going should you become suddenly incapable of running your business. This should be a person (or entity) that is trustworthy and has an adequate understanding of what it takes to make your business work in the short term. The person or entity should be prepared to keep your business afloat long enough to find a long-term replacement and/or sell the company.
Long-term succession planning may include grooming a promising employee to take over your role. Many business owners hope to have an adult child or other close relative prepared to step into their shoes when the time for the business owner’s exit arrives. In some circumstances, it makes sense to transfer the ownership of the company to the planned successor over a number of years. In this method of succession planning, the successor receives more and more of the company each year until the business owner is ready to transfer the majority of the ownership to that person. (In some cases, it is not one person, but a number of people that will succeed the original owner.)
Many people understand the future benefits of succession planning, but few people have considered the present-day benefits of succession planning. First and foremost is the peace of mind that is gained through comprehensive and proactive planning for the future of your company and your family. Second, there is the benefit of having your employees, vendors, contractors, and other people and entities with which your company has a business relationship know that your company will not cease functioning should something happen to you. If you want to retain long-term employees, it helps to reassure them that the company will exist even if you are not there to run it.
At Pacific Northwest Law Group we have some helpful Succession Checklists and Guides to help kick start your thinking and proactive steps! If you would like to discuss the future of your business, please contact Pacific Northwest Law Group today.