When many of us think of business succession plans, we often associate them with retirement. However, succession planning also serves as an important part of a business earlier in the lifespan of the company. If nothing else, having a succession plan in place will reduce headaches, stress, and financial loss if something unexpectedly happens to you or a co-owner.
A succession plan makes it clear who will take over the company, therefore reducing any disputes between the parties involved. If a purchase takes place, the purchase terms and sale price are also outlined, relieving some of the difficulties for the owner and/or their family. A well-formulated succession plan will benefit everyone, including the departing owner, the business, and the successor.
Five Types of Succession Plans
Although there are a variety of succession plans available, the following are five of the most common types of succession plans for small businesses:
- Passing the Business to a Co-Owner – If your business was created with a single partner, you will likely consider them as a potential successor. Many partnerships create an agreement that states that in the event of one partner’s death or disability, the remaining partner will purchase the business interests from that partner’s next of kin. This type of agreement will ease the burden of a transition that is not expected for both the family members and the business. A buy-sell agreement will ensure that the family is given a fair price while allowing the remaining partner to maintain control of the business.
- Passing the Business to an Heir – This option is often used for business owners that have family members or children that work for the company. Of course, like many family decisions, passing your business on to family can stir up conflicts if it is done without proper planning. As a general rule, you want to be sure business ownership is transferred to someone that is already involved in the business. If you have multiple family members involved, you will need to give clear instructions for who will take over what parts of the business, as well as how certain business assets may be passed to other heirs.
- Sell Your Business to an Employee – If you do not have a family member or partner to pass your business to, another option is to sell it to a key employee instead. You will want to choose an employee that is respected by other staff and has the necessary experience and business savvy. This will ensure that the transition goes as smoothly as possible. You will also need to ensure that this person is on board with the transition and train them to ensure that they will be prepared when the time comes.
- Sell Your Business to an Outside Party – When there is no obvious successor to take over your business, you can look outside to the greater community. Is there a competitor or entrepreneur that might like to take over your business? Some types of businesses are easier to sell this way than others. To prepare for this transaction, you need to hire and train a general manager and make sure that all your finances are in order. Make your business as “turnkey” as possible, so that it will be more attractive to outside buyers.
- Sell Your Shares Back to the Company – This option may be available to you if your business has three or more owners. An entity purchase plan is a business arrangement in which the business purchases insurance on each of the co-owners. When one co-owner dies, the business will use the proceeds from the insurance policy to purchase that partner’s business interests from their estate. These interests would then be distributed among the surviving partners according to terms outlined in the succession plan.
Contact an Illinois Business Succession Lawyer
The dedicated DuPage County business law attorneys at Momkus LLC have decades of experience helping our clients plan various aspects of their businesses, including creating fair, workable succession plans. Contact us today by calling 630-434-0400 to schedule a consultation and learn how we can help you ensure that your business is still viable years after you are no longer a part of it.