If you are a business owner, you might wonder what happens to your business once you retire. This is particularly true for businesses you started yourself, you may be thinking about how to ensure the continuity of the business even when you are no longer at the helm.
It is, in a very real sense, about building a legacy.
This brings us to the core question of this article: what is business succession planning?
What is Business Succession Planning?
Much as the question suggests, business succession planning is about how to ensure the continuity of a business once the primary business owner retires, passes away, or becomes incapacitated.
This is a specialized area within the broader estate planning field, dealing with what is often, for most families, their most valuable asset: their business.
Having a plan in place is actually one of the core concepts of business continuity and risk mitigation. If something happens to the primary business owner, who will take over? Who will manage the business? How will ownership transfer?
More importantly, how can the transition process take place with minimal disruption to the business itself?
This is not simply about having a successor in mind. It is ensuring that the business has a process in place to facilitate the quick and efficient transfer of ownership and authority. All this while ensuring the continued and, as much as possible, uninterrupted operations of the business during this transition period.
Why Does It Matter?
Or more pointedly, why does it matter for estate planning?
After all, if you should pass away, any assets you leave behind – including businesses you may own – will be left to your heirs and beneficiaries. The business should continue running itself – especially if you have trusted people to take over its management. Ownership can be sorted out in time, depending on which family members are even interested in continuing it. In any case, the benefit ultimately goes back to your loved ones and family.
Business succession planning is important precisely for all of these reasons – you want to make sure that qualified and trusted people will be ready to take over, that ownership remains with the family and/or people you trust, and that your family will reap the benefits of all the hard work you put in building your business.
But the question is also important primarily because unless you have a plan in place, then the rules of intestacy will apply.
Under California Probate Code §6400, if there is any part of an estate that was not disposed of in a will, then it passes to the decedent’s heirs as prescribed under the rules of intestacy. These rules are set out in California Probate Code §§ 6400 – 6455.
For the rules of intestacy to apply, we presume two things: that the business was not placed in a trust; and either there is no will, or if there is a will, that it was silent with respect to the business.
Protecting the Business
There are several risks to relying on the rules of intestacy.
First, you are placing your reliance on the uncertainty of statutory formulation. And while it is true that the rigid rules of intestacy might give you a clear enough picture of who will take over the business, this is not always a certainty. Family members may pass away, or they may simply refuse to take over your business. And the succession would be determined by relationship ties rather than qualification or skill.
Secondly, without a trust, the risk is that the business might be end up in probate for an indefinite period while ownership and leadership issues are threshed out. This is something that cannot be good for any operating company. If your family members disagree about who will be taking over, conflict might ensue, which can prolong court proceedings indefinitely.
And lastly, matters of succession or ownership aside, for an actively operating business, the primary concern is that a specific person must have the immediate authority to take over, manage operations, and make decisions. This ensures the stability and continuity of the business itself, not to mention the continued loyalty of employees, clients or customers, and business partners.
By having a plan in place, you take control of the process of transitioning the business to new leadership if something should happen to you – and you are assured that the person who takes over is someone qualified and reliable. A good business succession plan will do all this without the need of involving the court system.
Coordinating Business Succession with the Internal Policies of the Business
Most businesses are built on documentation defining what the business is, its core principles, its internal rules.
Companies, for instance, have articles of incorporation and bylaws. Partnerships have partnership agreements.
These internal business documentation: bylaws, operating agreements, shareholder agreements, for instance, usually contain the rules with respect to changes in leadership and any transfers of ownership and management rights.
In order to ensure a smooth transfer of authority or ownership, you will want to make sure that your business succession plans align with your own company rules.
Otherwise, any changes might be contested for failing to adhere to the same rules that define what the company is. This is the very opposite of what is ideal: stability, foreseeability, adherence to internal policies and rules.
A careful review of your business documents conducted by an estate planning lawyer should be conducted alongside any business succession plan you are planning to put in place. Otherwise, this could lead to uncertain leadership, and potentially, internal disputes and legal challenges that could tie up the business in court proceedings.
Any business succession plan must align with any broader estate plan of the owner. And both must align or sync with the business’s own internal policies. This would ensure the continued productivity and operations of the business, while at the same time ensuring that your vision for its future is carried forward by the people you have chosen to lead it.
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Are you looking to ensure that your business has a viable succession plan in place? Contact us today and we can help ensure that your business is protected and that it continues to support your family for years to come.