Business Succession Planning Tips
According to the U.S. Bureau of the Census, over 90% of all businesses in America are family-owned. Yet a Wilmington Trust survey found nearly 60 percent of small business owners do not have a succession plan in place. It’s no surprise then, that less than 1/3 of family businesses survive to the second generation.
Owners of any business from a family business to a partnership or a large corporation need to consider what happens if the owners die. Who will own and operate the business? Should the business be sold? The strategies vary depending on the legal structure of the business, the type of company, and many other issues.
The documents used to address the business succession areas will vary too. For sole proprietorships, a will is generally used to designate the successor. If there is no will, the intestate laws will determine who owns the business. For partnerships, the partnership agreement should designate a successor. For LLCs this is usually done in the operating agreement or a related buy-sell agreement. For corporations, ownership and succession is mainly determined by the ownership of the shares of stock and the corporate by-laws.
Businesses should consult with experienced business lawyers and estate lawyers to ensure the proper issues are considered and the right documents are drafted and executed.
Some of the key factors revolve around the following issues:
- Is the business a family-run business? If so, the will should designate which family member will own the company and who will run it. If the business is a professional business such as a medical practice, it may not be possible to have a family member run the business unless that family member is also a doctor in the same specialty. If a family member can run the business, that person should be considered; otherwise the more practical solution may be to sell the business. In some cases, the owner (such as a spouse) may be different than the person who runs the business. If multiple people can run the business, then the new owner will have to decide who runs the business unless the decedent made proper provisions in his/her will.
- Who takes the Reins? If the business is a partnership, then generally the other partners are the most logical choice to run the business instead of bringing in an outside party. Most business partners tend to work well together but would not want to work with a partner’s spouse or children.
- Governing Documents Control. In an LLC, the operating agreement and in a corporation, the bylaws, generally dictate who will run the business – except that the majority owners can appoint someone within the company or someone new and can amend the bylaws. These documents must be properly drafted taking into consideration what role the partner had in the business? Were they just an owner, were they an officer, or did they manage the company in some way?
- Funding a Buy-Sell Agreement. This is often one of the most important provisions that must be included in any operating agreement. Deciding whether to fund a buy-out through life insurance or an installment sale and deciding upon a valuation methodology in advance is critical in advance in order to prevent future disputes.
Speak with a skilled Arizona business succession planning lawyer to protect your investment
Business succession plans also need to consider any tax issues, when the company may need to be sold, and a range of other issues. Our Tempe Arizona business succession attorneys are experienced wealth planning lawyers. We help businesses and individuals plan for all stages of their work life including what happens when an owner or a business dies or a manger of the business dies. We have the experience to consider a full range of practical, financial and legal issues that need review. For help choosing and appointing a successor for any type of business interest, call us at (480)-442-4175 or fill out our contact form to schedule an appointment.