Have recent headlines caught your attention yet ? No , not hurricanes , the economy , jobs or the local football scores . Wal-Mart slips on the Fortune 500 list . Oil prices suffer the largest one-day decline in nearly six months . One in seven with Alzheimer ’ s disease lives alone . Your 40-year old neighbor had a heart attack and died . A friend ’ s 90-year old father just retired . . . from his second job ! Those headlines oftentimes raise the very personal question : “ What happens to my business when I am not there ?”
To answer that question , your advisors and you will ( should ) begin a process called “ succession planning .” The process focuses on answering ( or at least trying to answer ) a series of questions to address transitions in governance and value transfers arising from expected and unexpected / sudden life events , like death , disability , or retirement . For public companies , their boards of directors will spend much time considering the person who will move immediately into the open spot . Oftentimes , that decision is held in a sealed envelope to be opened only if and when needed . The focus for public companies is primarily one of corporate governance and continuity with little direct concern about value transfer ( although the effect of the board ’ s decisions on public value is certainly in play ). For private-held businesses , like private patient pedorthic practices , retail footwear operations and vendor suppliers , the issues are actually more complex . As a business owner , you will have to decide not only who will take on your role , but what will happen to the value you have created .
There is no single plan that works for everyone . But a plan will evolve from the answers to more questions . Here are the primary questions ( and a few more ) for you to think about --
1 . Is the transition event permanent ( retirement , death , permanent disability ) or only interim ( surgery , illness , vacation )?
2 . Who will take over in your absence ? Will that person step into your shoes as both an operator and owner or will those roles be separated ?
3 . Does your successor know your business ? If not , how will your successor learn about your business ? Is he or she currently working in the business or will you have to find someone from elsewhere ? Will that person be your spouse or a next generation son or daughter ( or their spouse )?
4 . How will the transition occur ? Will you announce your successor in advance ? Will the succession be automatic , by agreement or perhaps left to others to decide ?
5 . What happens if there is no one to step in ? Will the business be sold or liquidated ? If there is a liquidation , will it be orderly or frantic ( i . e ., bankruptcy or no bankruptcy )? Who will carry out the transaction ?
6 . How will the business operate if the transition is not immediate ? Can your employees carry on for a while without you ? If not , then what ?
7 . In what form is your business carried on ? Is it a sole proprietorship , corporation , partnership or limited liability company ? Do you have a single business entity or many ? Are your organizational documents in order ? Where are they ?
8 . What is the nature of your business operation ? Do you work alone ? Do you have business partners ? Do you have employees ? Do you have a single location or multiple locations ? Do you have inventories ? Do you have personal liability to banks or suppliers ? Does you home secure any business loans ?
9 . If you have a business partner or partners , are they related or unrelated to you ? Are they the same generation as you ? Who controls the business ?
10 . Do you have a transition agreement with your partners ? Do you have a financial power of attorney ( durable or limited )? Do you have a Will or lifetime trust ?
11 . What are the key transition elements of your agreement ?
a .
b .
c .
What happens if you die ? What happens if you are permanently disabled ? What happens when you are ready to retire ? Is there an optional or mandatory buyout of your interest ? How is the purchase price paid ? Is there insurance ? What happens if the insurance is not enough ? Or too much ?
What happens if an outsider offers to buy your interest in the business ? Does your partner have a right of first refusal or approval ? Can you drag your partner along if the outsider wants the entire business ? Can you be dragged along ?
What happens if your partner and you disagree about a business decision ? Are you deadlocked ?
12 . How will you evaluate your business to determine a purchase price or other valuation need ? Will you require an appraisal or agree on a value ? Will you rely on arbitration ?
13 . Does your transition plan require a transfer of your interest within your family ? Or to a non-family member ? Will the transfer occur while you are alive or on your death ? Will the transfer include voting rights or ownership rights , or both ? Will the transfer be by sale , gift or bequest ? Who will be your trustee or personal representative ( executor )?
14 . What are the tax consequences of your transfer ? Are there income , gift or estate taxes due ( don ’ t forget state tax implications )? What is the funding source for those taxes ? Will you need a loan ? Is there enough insurance ?
15 . Who will control the business
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