If you’ve put your heart and soul into building a successful business, you may have also given thought to what happens when you’re no longer around to oversee the daily operations of your company. Succession planning involves creating a strategy to ensure your company remains successful after you’ve moved on to other endeavors. It’s sometimes referred to as replacement planning, and it should be done well in advance of any planned exit.
In a small business, it is typically just the owner and/or co-owners who are involved in creating the succession plan. For larger companies, the board of directors and the CEO may be involved.
You Should Create Two Types of Succession Plans
Most often, succession planning involves making arrangements for the future of your business after you retire or decide to leave the company to pursue other opportunities. However, planning can also include contingencies to ensure the business would be able to operate smoothly if you suddenly passed away or experienced a disabling illness or injury.
You should create two separate succession plan documents: a long-term plan to be used for a planned departure and an emergency plan for when a replacement is needed immediately. This ensures your company is prepared for whatever the future may hold.
Choose Your Successor Carefully
Depending on your business, your succession plan might involve selling to a co-owner or partner, choosing a member of your family to assume your leadership role, or promoting a longtime employee into management. Think about the existing skills each potential successor brings to the table, as well as what training opportunities they would need to be effective in the new role.
If you’re wondering whether a particular individual would be a good fit, consider planning a trial run where they assume leadership for a week or two. This can help you assess general competencies and determine what additional professional development is needed.
Create the Appropriate Documentation
Small businesses relying on “institutional memory” are at risk when a key individual is no longer able to perform their regular duties. Succession planning will require you to create formal documentation for all procedures and operations, so your chosen successor can effectively step into the role when needed.
If you’re planning to have a family member or junior level employee step into your role, considering having them review your documentation to ensure you’ve covered all the relevant points. What seems obvious to you after many years of running the company’s day-to-day operations may not be apparent to someone just new to the role.
Get the Necessary Legal Advice
Once you have a general idea of how to handle the operational issues associated with your succession plan, you need an attorney to make sure all relevant legal concerns have been addressed. Your attorney may need to help with:
When a company is owned by more than one person, a buy-sell agreement explains what happens to a co-owner’s interest upon death, disability, retirement, or planned exit. An attorney will typically recommend that each co-owner purchase life insurance to prevent cash flow concerns and protect their portion of the business in the event of their death.
Employee stock ownership plans
This option provides a ready market for a departing owner’s share of the company, but you’ll want to consult an attorney to ensure you understand the potential tax implications.
If you want the management team of the company to purchase the assets and operations of the business, an attorney can assist with financing issues and business valuation.
Mergers and acquisitions
If you decide to sell the business to a competitor, a business law attorney can strategize, negotiate, and execute the transaction.
Update Your Succession Plan Regularly
A succession plan is a living document. You should reevaluate your plan each year or when there are major organizational changes within the company to see if it still reflects your needs. All key stakeholders, as well as your attorney, should be involved in this process.
Do You Need To Speak With An Experienced Business Law And Succession Planning Attorney?
If you need to speak with an experienced business law and succession planning lawyer please feel free to contact us online or call our Virginia Beach office directly at 757.490.3500 to schedule your free consultation. We have offices throughout Virginia including Chesapeake, Newport News, Norfolk, Suffolk as well as north eastern North Carolina.