The following article by Lin Law LLC’s Attorney Emily E. Ames was published in the March 30, 2020 issue of The Business News as Now is good time to review succession plan.
Preparing During a Pandemic: Does Your Business Have a Succession Plan?
In the midst of a global pandemic and the corresponding uncertainty regarding the future, now is a good time to review your business’ succession plan (if you have one) or to start putting one in place (if you do not). Unsure whether you have a business succession plan? Two basic but important questions for business owners to consider are: “what will happen to my business when I’m ready to retire?” and “what will happen to my business if I die unexpectedly?” If you do not have a good answer to one or both of these questions, it’s time to do some work.
At a minimum, it is important to ensure that your business has all the necessary documentation in place. For a limited liability company, this will primarily consist of a comprehensive Operating Agreement, and should also include consent resolutions executed by the members, which document important transactions and business decisions. For a corporation, this means up-to-date Bylaws, accurate and regularly-maintained corporate minutes, and a Shareholders’ Agreement or other similar Buy-Sell Agreement. The business should, ideally, have an Employment Agreement in place for all key employees.
There are also practical considerations to keep in mind. Does someone other than you have the log-in information for all hardware and important software? Does someone other than you have access to the information necessary to maintain essential business operations? If the answer to either of these questions is “no,” begin documenting these items as soon as possible.
Another issue to consider is whether you intend to pass the business on to an employee or business partner, or whether you would prefer to sell it to a third party. If the former, it is important to begin identifying potential successors and training them as soon as practicable. The sooner you start, the better. If the latter, consider how you will go about identifying an appropriate buyer and what you can do to make the business more marketable. In both cases, it’s important to understand what your business is realistically worth.
Keep in mind the interplay between your business succession plan and your estate plan, and ensure that the two are coordinated. Ideally, your Operating Agreement or Shareholders’/Buy-Sell Agreement will specify what happens to your ownership interest upon your death. These documents will frequently grant a right of first refusal for the corporate entity or other owners to purchase your ownership interest. If this is the goal, it’s important to have life insurance in place that will prevent any liquidity issues in the event the corporate entity wishes to exercise that option. However, if none of the other owners or the company are willing or able to exercise such option, your ownership interest will generally be distributed in accordance with the terms of your Will or Revocable Trust, if you have one, or the default laws of inheritance, if you don’t.
These issues are just a starting point, but they illustrate the importance of having an official business succession plan in place. While having no official succession plan for your business is still a plan, it’s not a very good one.
If you have any questions regarding this topic, please contact Lin Law LLC at (920) 393-1190.