Legal Aid: A Blog About Laws And Legal Processes

4 Considerations to Make During Business Succession Planning

21 June 2016

Renee Bates

Whether you own a business or a farm, there will be a time when you won't be able to run it anymore. This may be because of age, disability, illness and even death. Without planning for the running of the business ahead of time, you open your business up to succession wrangles and confusion that could permanently impact the business. Good business owners must therefore be proactive in laying mechanisms to help the business survive in their absence. The following are the most important considerations in the planning process:

1. Pick the right successor(s)

Family businesses are slightly more complicated, as the plan of succession will depend on the number of children in the family and whether they are interested in taking over the business. Each potential successor should be objectively evaluated to determine their weaknesses and strengths. The person(s) selected will need to be integrated into executive matters to ensure that they are adequately prepared when ready to take over. Establish a succession timeline, such that at any one point, there is no uncertainty regarding who is in charge.

Consider any financing options if selling to a family member who must buy company stake. This way, should you need to hand over suddenly, the successor doesn't have to struggle with raising a large sum of money at once. Ensure that the financing plan, including interest payable and repayment terms have been legally stipulated. If you're going to sell to a partner, you need a buy-sell agreement which outlines the financial structure of the arrangement.

2. Find out the business value

The process of determining a public company's market value isn't difficult. For private companies, certified valuation is mandatory. In partnerships, the partnership agreement should include details on how the business will be valued for succession purposes. You will need to review financial statements over the last few years, as well as assess the state of physical and non-tangible assets held. This will help you determine the fair value of your stake and how it will be divided among your successors.

3. Account for ongoing business relations

Your departure from the business will have some impact on business relationships -- including relationships with longstanding customers and suppliers. Part of the transition plan should include introducing your successor(s) to the most important relations and vice versa. In the ideal circumstance, a gradual phase-out (having less control and giving the successor more control) is preferable, but this may not be a possibility. Document the most important business relationships in case succession comes sooner than anticipated so that the successor isn't plunged into confusion.

4. Plan for life after the business

If ceding control voluntarily (i.e. not for illness, death, bankruptcy etc.), you will need an income to live on. If coming from the business, this must be documented legally. Will you draw a monthly income or just have a one-time large payment? Calculate how much income will sustain your life when you're no longer working for the business.

Your reasons for selling will determine the payment upon retiring. For instance, if you're selling to start another venture, a large payment will be preferable to provide capital for the new business. Legally documenting everything will help you avoid winded arguments and legal battles in the future. Select a lawyer you trust to help you with each part of this process so that things go according to your plans.

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