A family business is something you work hard to build. For many people, it’s their life’s purpose. Protecting that legacy is critical, but without the ability to see into the future, it’s best to plan for anything. That’s why succession planning is important: because you can’t always predict what will happen.
A trusted business attorney can sketch out the eventualities that a succession plan should encompass. Even if family disputes or disability are not on the horizon now doesn’t mean they are impossible. Failure to plan is a plan for failure.
Why Succession Planning is Essential
It’s common for an entrepreneur to be so busy with the day-to-day work of building a business that other things fall by the wayside, including planning. But succession planning is the forward-looking strategy for the business’s future, and for your family’s future. Some Illinois businesses are required to have a succession plan. Make sure yours includes:
- Developing a vision for the future of the business, whether that’s selling or transferring ownership to a family member
- Training your successor in the processes and procedures necessary to keep the business running
- Making a contingency plan for attracting and selling to an outside buyer, including a time line and compiling the appropriate documentation
Without a succession plan, there can be family discord, loss of value in the enterprise, inconsistent leadership, interruptions in providing goods and services to partners, and, potentially, a costly shut down that can be impossible to recover from.
By establishing and maintaining a strategic vision for your business it’s easier to keep things on track. Motivated successors can carry it into the future by innovating and building upon a strong foundation.
Steps to planning for succession:
- Defining your vision and goals. Where do you want the business to be in 20 years, or in 50, and what can you do to make it happen? Do you want your family to retain ownership or to actively manage the business? Perhaps merging with a competitor or selling is the best option as the product line changes or new technology evolves.
- Identify a successor. Who has the ambition and aptitude to run the business, whether a family member or employee? Discuss the opportunity with them and measure their readiness and interest.
- Develop a comprehensive estate plan. Oftentimes, a family business is closely held and is considered part of the founder’s estate. Your estate plan must be coordinated with other documents so they work together rather than contradicting one another.
- Prepare legal and financial documents. Enumerating business assets and deficits when preparing to sell or transition to new ownership or management is a major undertaking, but that’s not all. You’ll need buy‐sell agreements, trust structures, operating agreements (for LLCs), trust structures and other documents to define roles and contingencies.
The buy-sell agreement is of particular importance because by defining things like the way the business can be sold, method of valuation, and restrictions on sales, it lays the groundwork for succession. - Establish business valuation and liquidity. Ownership transfers require determining the business’s liquidity and valuation, planning for buy-outs and taxes.
- Communicate with stakeholders, prepare to train the successors. Open communication with partners, stakeholders, and family members is key to a smooth transition, as is properly preparing your successor.
- Contingency planning. A robust succession plan includes all potential outcomes such as death of the principal, changes to the business, or the successor pulling out.
Your Partner in Succession Planning
Having a knowledgeable partner, such as the professional attorneys at Legacy & Life Law Firm, can make a world of difference. Someone who is experienced in Illinois business law can ensure that your business plan covers succession planning partnership agreements, and estate planning while being legally enforceable.