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The Importance of a Business Succession Plan

It’s often difficult for us to think of the future as individuals, and even harder to think about it in terms of our larger counterparts, such as the businesses that we own and run. This is particularly true if it involves planning for the worst possible outcomes in our future, such as unexpected retirement, potential disability, or untimely death. When you build your own business and watch it flourish from the ground up, it can be disheartening to think of the possibilities of its disbandment or transfer to a new owner.

However, having a business succession plan is just as important as a business opening and continuity plan—yet it is one of the most commonly neglected processes. The lack of a business succession plan may not only affect your business you’ve spent years or decades building but also your own security, as well as the security and peace of mind of your family members, employees, and other business stakeholders.

One of the things to take away from the COVID-19 pandemic is that disruptions to business can occur at any time, causing extreme consequences for everyone involved if there isn’t a plan in place for how to adapt to change fast.

When COVID brought on travel restrictions, work from home mandates, high standards for cleanliness and disinfection as well as a potential loss of your workforce, was your business prepared?

Unexpected disasters do happen, and just like your business purchases insurance to plan for natural disasters or invests in security systems to plan for break-ins, it’s crucial to consider what your plan for your business might be if a personal emergency were to strike.

A business succession plan might seem like a plan for an ending, but it can also be seen as a plan for a new beginning. How will your business continue, either in providing for your clients or as a way to support your loved ones?

Why Might I Need a Business Succession Plan?

A business succession plan is best known for stipulating what will happen to a business if there were to be an unexpected accident, illness, death, or disability that could cause short- or long-term incapacity for the owner to handle day-to-day business responsibilities.

However, the plan could also have stipulations for the sudden loss of a key employee, a pandemic or natural disaster, or other events that might interfere with day-to-day business procedures.

People often think about a business succession plan as something that you should begin to prepare when you are thinking about retirement. However, they can cover a multitude of different scenarios and provide benefits like peace of mind, increased business cohesiveness and value, and ultimate savings in taxes and other fees when a change in ownership or liquidation might occur.

In starting up and maintaining your business, you may also have a lot more loose ends than you realize. For example, things like bank loans, lines of credit, and business bank accounts can create a mess for your loved ones if you don’t have a plan for how to manage them.


Why Does It Need to Be Done Ahead of Time?

There are a lot of potential options such as selling or sharing ownership with a co-owner, passing the business onto a family member, friend or key employee, or liquidating all of the assets and disbanding the business.

Creating a business succession plan now allows you to look into and consider all of these options and ensure that what you want to be the future of your business becomes a reality.

But maybe you have no plans to retire from business anytime soon and see yourself as a healthy, young person with relatively low risk. Maybe your business is small so you’re not very concerned about the loss of key employees or the need to be flexible should anything come up.

It’s important to keep in mind that the need to step away from a business may seem infinitely far away – until it’s right in front of you. Should the time ever come when you need to leave, you may not be in the best frame of mind to make these heavy decisions.

The time to plan for a crisis is before it happens, not during it. Not to mention that putting these decisions into place can take time and resources which you may not have set aside in time for the change.

In the same way that having a personal will or estate plan might give you as well as your family members peace of mind, a business succession plan can do this for your whole business. If anything were to happen to you or one of your key employees, you can feel secure in the meantime knowing that there is a plan to help relieve stress for those who are left to pick up the pieces.

Alternatively, you may already know exactly what the plan is, but just not have written it down. By putting down exactly what you want in writing ahead of time, you avoid the potential for a multitude of misunderstandings, conflicts, and offer those around you a clear path forward.

Creating a solid business succession plan can even increase the valuation of your business should you choose to sell it—it shows on paper that you plan ahead and smooths the transition for a new business owner.

There is also a great potential for reduction or even elimination of estate and income taxes with a solid business succession plan which can help with preparing your employees for retirement in the long run.

Finally, identifying a plan now gives you time to ultimately prepare for that plan and have more control over the process.

But What If My Plans Change Over Time?

It’s an inevitability in life that no matter how much we plan for things, we may still feel unprepared when the time comes. Your business is a dynamic, living thing that may change as years go by, and similarly, your thoughts about your team and what might be best for the business will likely evolve as well.

This is why it’s so important to start planning early and cover as many possibilities as you can. The sooner you start making plans, the longer you have to tweak them to fit your needs and the needs of your business more precisely.

We suggest you create a plan that goes into as much detail as possible, and that you also update it frequently. It might be wise to revisit it yearly depending on events like retirements, resignations, illnesses, and the changing value of the business.

Incorporating business succession planning into the routine of the business in this way maximizes your likelihood of being prepared for something that otherwise may have caused real harm.

I Don’t Know Where to Start

There are a lot of moving parts to a business succession plan, and the earlier you get started—wherever that might be—the better off you’ll be.

A business succession plan typically includes some collection of the following:

  • Stipulations about timing and various scenarios (if this, then…)
  • A valuation of the business, including the method by which the business was valued and how often (this should be updated frequently—every 1-5 years depending on the business)
  • A way to fund the plan, like life insurance policies, loans, or buy-sell agreements
  • How the plan will be implemented and communicated to customers, family members, employees, and stakeholders
  • Tax planning and contingencies
  • An order of consideration for potential successors
  • A collection of documents, procedures, employee handbooks, and other training documentation for standard operating procedures
  • Potential sales prices and purchase terms
  • A mission statement to maintain brand identity and consistency

It’s important to anticipate what questions might come up if you as the owner of the business or other key players are not present to answer them. For example, are there complex processes that only you know about or understand? Is there information such as locations or logins that may not be written down anywhere?

But the best start begins with a conversation. Begin discussing the process with your family members, close executive employees, and stakeholders, and start putting together a team that might involve accountants, lawyers, or other tax professionals that can help you develop and refine your plan.

You can shoot for a few months of developing a team and having conversations, a few months of developing the plan and refining it, and then a few months to implement it at the end of a year or so. After that, the process should be revisited frequently to be updated thereafter.

All of this may seem a bit overwhelming—which is why we suggest getting started as soon as possible. We at Lowthorp, Richards, McMillan, Miller & Templeman are here to help you and are a resource to help you get started on a business succession plan that you can feel good about. We know what it takes to successfully plan for the future, and we truly care about what is most important to you. Together, we will evaluate your assets, discuss your goals, and work to prepare, provide, and implement estate planning options that best serve you and your family. If you are interested in taking advantage of the increased gift tax and estate benefits provided by the Tax Cuts and Jobs Act of 2017, let us lead your way. For more information, we invite you to visit our website, or call us at 805-981-8555.

NOTE: The information contained herein is not intended to be legal advice and the reader should know that no Attorney-Client relationship or privilege is formed by the posting or reading of this article which is also not intended to solicit business.

Cristian R. Arrieta, Lowthorp Richards McMillan Miller & Templeman, A Professional Corporation, 300 E. Esplanade Drive Suite 850, Oxnard, CA 93036