If you own a business, your job isn’t just to start, and run the best business in your industry. Your job is to make sure that what you’ve built today will be here tomorrow. After all, others in your industry are hoping that you’ve become complacent, and have neglected planning for the future. That being said, why does your business need a succession plan, and what should that plan include?
3 reasons why you need a succession plan
- You can’t predict the future- and I’ve learned this one the hard way. Bad things happen to good people; and sometimes, the unexpected happens.
- If you aren’t prepared, unexpected catastrophes can shut down your business. What happens if you unexpectedly have to travel across the country for a medical emergency? Will your business shut down? Legal documents, bank accounts, and employment information may be put at a standstill; and in a worst case scenario, all aforementioned could end up in the legal mess that is probate.
- Plan for your loved ones, and your team. Ensure that you have the right documents in place for your team, and your estate plan in place. If you don’t, your business could end up subject to probate with the rest of your assets, which is a lengthy and expensive process that would have dire consequences for your business.
What should your succession plan include?
- Build a solid foundation now. Make sure that your business is structured properly from the outset- for example, if you have an LLC, make sure you have an operating agreement that allows the business to be independent of you, so that when you exit, the company can continue to function.
- Contracts (specifically, buy-sell agreements). First, make sure your regular client contracts contain terms that allow for “incapacitation” or “options to cure”. But more importantly, if you have any sort of partners (even minor partners) in your business, it is imperative that you have a carefully-structured buy-sell agreement. A buy-sell agreement will define what constitutes incapacitation; how the business will be valued, and how the business will be sold if you must exit. Buy-sell agreements are some of the most important documents a business owner can have, and are some of the most detailed documents you will need, and will be discussed in greater detail at a later date.
- Identify key persons. Identify not only the key roles of the business and your team, but who your successor will be (and how that will be determined, if your first plan for some reason isn’t able to be implemented according to your specifications).
- Create your estate plan (in other words, get a trust. It’s absolutely never too early to have one).
- Document your account details, such as your key advisors, your bank accounts, etc. All information can be found on the document I’ve created for you here.
In summary, write out your succession plan while you can, before it becomes something your business must have. A succession plan, which again will consist of your estate plan, a buy-sell agreement if you have any partners, and any specific written directions for the roles or duties of an individuals within the business, will create an infinitely smoother transition for your company if you are forced to step away for one reason or another. This will require substantial foresight, and in many circumstances, particularly as your business grows, may require a formal business restructuring to ensure that your business continues as you wish.