Why You Need to Create a Business Succession Plan Now
Even when all owners of a company plan to work until the very end of their lives, there’s still a need for a viable business succession plan. After all, anyone can become totally or partially disabled as a result of a serious car accident or die of a deadly disease on almost any day.
When business owners hide from this reality, they often create havoc for all surviving partners or family members. Instead, it’s better to move forward at a calmer time to carefully address these types of possible future events.
Your Houston business law and estate planning attorney can help you decide on the best way to either pass your business on to others — or liquidate all the assets to meet your own needs and those of your survivors.
General questions you must answer yourself about any succession plan
- What is the current market value of this business and all its assets?
- Who is the best possible buyer? Do I prefer to sell the business to a co-owner, family member, employee or a third party?
- Am I more likely to sell the business sooner rather than later? Am I interested in selling the company now due to health, retirement or other reasons?
- Is this business tied to its current location? If not, would it be reasonably simple for the business to be moved elsewhere and successfully run by someone there?
- What preferences do I have about how the sale should be financed? Am I willing to personally finance the loan? If so, what type of collateral should I require?
- Which business advisors should I consult with while securing all the required contracts and other paperwork? Besides business and tax lawyers, do the specific assets of my company require me to consult with real estate agents, insurance and business brokers, bankers and financial advisors?
It’s often wise to start this process by locating and reviewing all your current business contracts and deeds. Next, give some thought to your company’s most productive and respected employees. Then, carefully determine the current market value of every business asset. Finally, schedule confidential, preliminary talks with any co-owners, family members who work for you, other key employees and perhaps one or two other potential buyers of your company.
Once these initial tasks have been handled – or while you’re completing them – it’s wise to meet with your Houston business law attorney.
Advantages and disadvantages of selling to different parties
Unless you’re the sole owner of the company and simply want to liquidate all the business assets and not sell (or transfer) the company to others, you must carefully evaluate each potential buyer and decide which one is best qualified to run the company in your absence.
- One or more family members. In most instances, it’s usually best to sell to only one family member, preferably one who is already involved in the business and respected by your employees. Ask your attorney about the best ways to prevent future challenges to any decision you make. One approach might involve drafting a buy-sell agreement that clearly states who is going to be running the company — and asks all others who currently work there (or own shares) — to sell their shares to the person you’ve named as your successor. This approach often helps minimize future family disagreements.
When selling a business to a family member, you may want to execute a self-canceling installment note (SCIN). Your attorney can explain why that may be useful;
- A key employee who is highly knowledgeable and well liked by other workers. The most common drawback to selling to a key employee is that the person may not be able to give you a large down payment in cash. Be prepared to execute a buy-sell agreement that clearly lists all the valuable collateral for any loan you may be willing to finance. You can also suggest that this employee try to obtain an SBA (Small Business Administration) or bank acquisition loan that will provide you with up to 70% or more of the purchase price upfront;
- You can sell your shares to your co-owners. Be sure to clearly indicate the sale’s price and all purchase terms;
- An outside third-party or competitor. Be very careful when selling to this type of buyer if you’re financially depending on the person to keep running the company. Due diligence is critical when evaluating every potential buyer.
Since this article only provides a broad overview of the types of issues involved when drafting a business succession plan, you’ll need to obtain competent legal help to handle this entire process. Should you already have some type of succession plan, we can help you decide if it’s time to update it.
All our Murray Lobb attorneys have the necessary experience to help you create a business succession plan that’s specifically tailored to your company’s unique needs. We look forward to helping you draft all the contracts and other documents you’ll need while selling your business.