Business owners are frequently told that they should be engaging in estate, tax, succession or exit planning for themselves and their businesses. This type of planning may seem like a daunting task – the owner is often focused on working in the business rather than working on the business. However, one thing is certain: at some time during a business owner’s lifetime, he or she will leave the business, whether it is a voluntary departure by a sale or retirement, or an involuntary departure as a result of incapacity or death.
Who should be involved in helping a business owner develop a succession plan? The owner should have a “team” of advisers that should include legal, financial and tax advisers. The owner will need estate planning and business legal advice for the succession plan.
The financial adviser can help the owner determine what the owner can afford – can the business be gifted to a family member or employee, or does the owner need a liquidity event to provide funds for retirement?
As with any other transaction, income and estate tax issues always need to be considered as well. Another adviser that an owner may want to consider is a business consultant to assist the owner with readying the business for a sale or developing a successor manager or owner from within the business. The owner may also need assistance in transitioning out of his or her involvement in the business. It is very useful when all of an owner’s advisory team members are working together and each member understands the owner’s goals. This will require some financial investment by the owner.
The process of developing a succession plan is not something that can be accomplished in one meeting, so the business owner should have a short-term plan in place. For example, if the owner experiences a sudden life event that temporarily limits his or her ability to manage the business, have they identified the person who will manage the business for a short-term period and signed the appropriate documents? Who has signing authority for the business’s financial accounts? Who can sign the payroll checks? Who has authority to enter into contracts on behalf of the business, whether they are contracts for the purchase of inventory or the renewal of a lease or a line of credit? A power of attorney may be useful for some types of business entities to name a person to manage the business and handle these activities.
What if the sudden event limits the owner’s ability to permanently manage the business? In that case, the owner should be considering his or her financial needs from the business. Does the owner need the business to continue to provide an income stream? Is the business one that has value outside the owner’s personal work? In that case, the owner should work with the financial adviser to develop some short-term solutions, such as disability insurance.
Once an owner has these short-term plans in place, then he or she should be working on the long-term plan. There are several basic options for transitioning a business: selling the business, gifting the business, closing the business or a combination of these options. Each owner and business should have an individualized plan – one that works for the owner and his or her business. The transition or succession of a business with a written plan generally is more successful than a succession without a plan.
June Wiyrick Flores is an attorney and partner at Miller Nash Graham & Dunn, splitting time between the firm’s Portland and Vancouver offices. She works with families, family businesses and closely held businesses to develop and implement succession strategies. She also acts as general counsel on a multitude of business transactions. She can be reached at firstname.lastname@example.org.