Two things come immediately to mind when I think of succession planning. One is an old saying as to when is the best time to plant a tree and the answer is 20 years ago with the next best time being today.

I also think of Stephen Covey’s best-selling book, The Seven Habits of Highly Effective People, with its second habit especially applicable to this topic: “begin with the end in mind.” People do not always like to plan, but an exit strategy for a small business is critical and should be re-visited periodically as part of an ongoing strategic planning process. Books and seminars are abundant on this topic and I will try to touch upon some of the major points in this article.

The objective or “end in mind” is critical in this process. The owner must decide the ideal purpose of the succession. The owner may look upon the transition of the ownership as a means to fund retirement, annuitize years of hard work and investment, harvest wealth, or to leave a legacy to family members. The objective will then guide the process and end result.

In many respects, deciding the end result is the hardest part because once established, the owner’s team (lawyer, CPA, and other key advisors) can fairly quickly implement the plan. It may involve a gifting program to family members, securing a buyer (financial or strategic) and structuring it with proper financing (installment sale, owner or bank financing, and a decision as to whether to include an “earn out provision”), setting up an ESOP, granting options to key employees or family members, and purchasing life insurance to fund the plan. It may also be a combination of the preceding list.

When an owner begins succession planning, he/she should critically examine the business itself. Where is it in the business cycle? Is it still in its infancy, is it growing, is it stable, or has it begun a decline? How is the ownership currently structured and should tweaks occur before actual planning? How is the current business entity organized (C Corporation, S Corporation, LLC, partnership, LLP, or sole proprietorship) and is it now the right entity to pass on the business successfully? Are there employment agreements in place for key employees and do they contain strong covenants not to compete and confidentiality clauses?

Is there a written severance policy? What are the demographics of the existing employees and are they team players who will be adaptable to new ownership? Is the business plan still viable? How does the shareholder agreement (or members agreement for an LLC or partnership agreement for a partnership) handle succession? Is there a “drag along” clause in place if the majority owner wishes to transition and the minority does not? Is there a dispute resolution provision? How is the business to be valued and by whom?

Placement of key business assets can be a major wealth enhancer. How are key financial assets currently owned: are key pieces of equipment and real estate owned separately from the business entity? How about intellectual property: does the owner own the copyrights, trademarks, and patents in his/her own name and not in the business? Are leases and user agreements up to date?

The last point is that all of this needs to dovetail with the business owner’s estate plan. A lot can naturally flow from that process and often can involve amending current agreements. Non-probate provisions can be incorporated into some ownership documents and other agreements can be created or adapted to fit the desired result. The final plan also needs to be properly communicated to all stakeholders at the appropriate time. Business succession is inevitable in all of our business lives. It can happen from an accident, sickness, or planned exit (retirement or new career). It is important to keep it on the front burner at all times and attempt to keep it as simple as possible. Harvesting a lifetime of work should be the capstone of a successful career.

Gary L. Myers

Gary is a private attorney and spends a great deal of time advising business owners and their families on estate planning and succession planning, and represents a municipality on a variety of issues involving property rights and flooding. He also contributes his expertise to mediating contract and personal injury claims.