Succession planning is essential to successful business management. Effective succession planning will help you prevent costly inefficiencies and problems related to a change in leadership or a change in ownership. This is especially urgent if you are a business owner or executive and are within five years or less from retiring or transferring your ownership. Whether the transition is unexpected or highly anticipated, such changes are usually fraught with anxiety, and transitions can be painful. A knowledgeable attorney can help you minimize the turmoil and protect your financial interests.
Factors to Consider for an Effective Succession Plan
Current Business Structure
An effective succession plan takes the current structure of the business into consideration. Is it a corporation, partnership, or sole proprietorship? If it is a sole proprietorship, for example, you may be able to simply pass the business to your chosen successor through a will or a trust which becomes operative upon a predetermined event. An attorney can help you develop an appropriate strategy and draft the necessary documents, as well as assist you with negotiating a transfer of assets, identifying triggering events, such as your death, incapacitation, retirement or others, and minimizing tax implications or other expenses.
In a more complicated business structures, including businesses with a great amount of assets, experienced counsel will:
- identify the controlling documents of the business,
- identify what revisions may be necessary to those documents,
- assist you in making those revisions effectively, and
- create any special documents that may help maximize asset values and minimize expenses.
For example, in a partnership, your partnership documents will be an important starting point for planning and determining whether amendments are needed to enable succession planning or for authorizing the path forward. But that is only a starting point. Effective succession planning involves much more than reviewing documents, and it can become quite complex once you examine all relevant circumstances. Perhaps you have a professional medical or accounting practice. Have you thought about how you will handle your clients or customers through the transition? Or perhaps you have a family limited partnership. How will you balance a myriad of considerations such as income taxes, estate and gift taxes and asset protection? Would a new, sophisticated trust be useful in your situation? An attorney can help you analyze these types of succession planning tools and create these vehicles if appropriate for you.
In a case where you are contemplating transferring assets before your death, you may need a buy-sell agreement to transfer ownership. An attorney would also help you negotiate it, develop an appropriate transaction strategy, minimize disputes, determine fair valuations and balance your tax and estate planning considerations.
If your business is an S-corporation, you may face unique challenges when you transfer ownership as part of your succession plan. An attorney can work with you to develop the proper instruments for the retention or disposition of your S-corporation stock and ensure that you comply with the complex tax rules that govern ownership.
Levels of Authority
Most large corporations have some degree of succession planning in place through their position descriptions or corporate bylaws. An obvious and well-understood example of this is the position of President and Vice President. The Vice President usually becomes acting President if the position of President becomes vacant due to certain events that are often stated in the corporate charter documents. Beyond the Vice President position, does the corporation provide for succession farther down the chain of command? Most large corporations do provide a hierarchy of succession, but does yours? If not, should it? How much authority should be delegated down the chain of command? An attorney can help you answer those questions and give you advice tailored to your needs or those of your business.
Choice of Successor(s)
Your choice of successor(s) is an important factor also. Depending on the structure of your business (corporation, small or medium-sized, family-owned or partnership), you should consider factors like the candidate’s current role and experience. What special attributes and competencies will your successor need? Is your preferred choice willing and able to accept the responsibility? Are there other members of your leadership team who need to know and agree to it? If so, have you properly notified them, obtained their input or vote, and documented all the necessary actions? What disputes will your choice cause? It’s important to analyze these issues with the help of experienced counsel and prepare the appropriate instruments to ensure a smooth transition when the time comes to hand over the reins.
Objectivity is important when choosing a successor. However, human nature often succumbs to subjective factors such as personal biases and relationships. An attorney can help you vet the candidates.
Timing and Training the Successor
The successor must be prepared to take on the new role and responsibilities. To execute a well planned succession strategy, you should identify opportunities to provide in-depth and hands-on training in the critical aspects of the leadership role before the departure. Ideally, the training would include a well-rounded balance of executive roles as well as a thorough knowledge of the general day-to-day activities of the business. An effective succession plan should include a timeline for transitioning and benchmarks for knowing when the successor is qualified to take on certain responsibilities. A timeline ensures that there is a structured path for taking on responsibility incrementally, until the successor is fully in place.
In the case where a successor completes the planned timeline, the successor will have the luxury of some time to prepare under the guidance of a seasoned executive, while the outgoing executive can slowly ease out of his or her leadership role. Some of this training and the successor’s performance in that period undoubtedly will have occurred prior to the final selection of the successor. During this time, an attorney can evaluate whether the training procedures are fully compliant with any applicable government regulations or contract obligations pertaining to the particular change in leadership.
On the other hand, the departure of a key executive may be sudden or unexpected, such as an accidental death. A succession plan should already be integrated into the business plan and would allow for some degree of training to already be underway. If the business, regardless of its size and structure, had done effective succession planning with the assistance of counsel, successor training would have anticipated the unexpected and a successor will be prepared to step in with less turmoil than would otherwise exist. Without any succession planning in place, a sudden departure of a key executive could spell the company’s demise and wreak financial havoc on survivors. Why risk that?
Involve an Attorney Early in Your Succession Planning
Seek out experienced counsel early in your succession planning to develop viable strategies tailored to your needs. Our attorneys can help you throughout the process by helping you identify the planning issues you need to address and help you create the legal instruments that will help you achieve your goals.