By David Kronenfeld, Cotney Construction Law.
Critical components of a succession plan help prevent potential disruption down the road.
A good business succession plan finds its roots in a solid operating or shareholder agreement. Establishing baseline rules for who has voting interests, who can transfer their interests in the company, what happens if a partner dies, etc. all occur in the foundational documents of a company.
In addition to a solid operating or shareholder agreement, some of the common components of business succession planning include buy-sell agreements, gifting, an M&A transaction, employee stock option plans, management buy-outs and key-man life insurance.
- Buy-sell agreements are especially useful in a multi-partner business to ensure there is an agreed upon formula in the event a partner dies or there is a dispute.
- Gifting is an incredibly powerful tool if your estate is above the $5.6 million ($11.2 million for couples) estate and gift tax exclusion. Gifting minority shares in your company lowers the taxable value of your estate by applying minority discounts to the gift.
- A merger or acquisition transaction with a competitor or company or individual is another method of maximizing the value of your company and retirement as you look to transition away from your business.
- An employee stock option plan or management buy-out are also excellent methods for monetizing your business outside of its traditional cash flow and often give you time to transition out of the business over the course of several years.
- Company paid key-man life insurance can be a good tool to ensure that the company can afford to redeem your share of the company upon your death. This provides cash to your heirs while helping you sleep better at night.
Too often business owners are afflicted by the unknown unknowns – the business owner whose partner gets a divorce and now the ex-wife has a say in the business, the son who takes over management, goes to Vegas and gambles away “his inheritance”, and father needs to step back into the business. This is why a good business succession plan won’t rest on any single document, but rather is a holistic approach to providing “rules of the road” for any of those unknown unknowns whether they crop up in the first month of the business or one month away from the sale of the company you’ve spent much of your adult life building.
Author: David Kronenfeld is an attorney at Cotney Construction Law, who focuses his practice on a broad range of transactional matters.
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Editor’s note: This article was first published on Cotney Construction Law’s blog and can be viewed here.
Author’s note: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation. Regulations and laws may vary depending on your location. Consult with a licensed attorney in your area if you wish to obtain legal advice and/or counsel for a particular legal issue.
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