Business Succession Planning

/ December 16, 2010

Business succession planning is an important issue that should be addressed not only as part of an individual business owner’s estate planning process, but also by all of the owners of family-owned and closely-held businesses. Whether a business is owned by a single individual or a large group of investors or family members, everyone with an ownership interest should take the time now to address who they want to be in business with in the future.

As other posts on Epilawg have highlighted, the lack of planning for your death and disability can cause chaos for your family and friends. If you own an interest in a family-owned or closely-held business – even if the ownership interest is a minority interest – you should consider the additional layer of issues associated with this ownership interest. Your ownership interest is an asset that is part of your estate, similar to other intangible financial interests. Additionally, you must not only address your own estate planning situation, but you must also consider what would happen upon the death or disability of the other owners.

At a minimum, each owner of family-owned and closely-held businesses should address these issues:

  • Upon your death, how do you want your ownership interest to be distributed?
  • If one of your business partners passes away, do you wish to continue on with his or her spouse or children as your business partner?
  • How will the value of an ownership interest be determined for estate planning and tax purposes, and who will make the valuation?
  • Will those who inherit your ownership interest be entitled – or obligated – to participate in the management of the company?
  • Will the business continue operations after your death?
  • Who will operate and manage the day-to-day affairs of the business?
  • What if a business owner is also an employee of the company but later resigns to work for a competitor?
  • What if the deceased was also a manager or officer of the company and critical to the company’s operations?
  • What will happen if one owner is disabled and can no longer provide any meaningful contribution to the company?

Business owners should agree on these issues in a Shareholder Agreement, Member Control Agreement, or “buy-sell” agreement. A well-drafted agreement will address issues ranging from the death, disability, divorce, and bankruptcy of an owner. The agreement should also address the unique issues that arise when an owner is also a company employee, including non-competition provisions. Common methods of dealing with transfers of ownership interests, both voluntary transfers (an owner simply wishes to sell his or her interest) and involuntary transfers (such as death), include mandatory buy-outs, company redemptions, and rights of first refusal.

I advise business owners to be leery of providers of cookie-cutter, one-size-fits-all Shareholder Agreements, Member Control Agreements, and “buy-sell” agreements. An experienced business attorney can assist you by working through an issues list prior to drafting your agreement and arriving at a solution that works for all company owners.

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