While a succession plan is always important for the continued success of the business, the disturbing uncertainty brought on by the current pandemic makes an important plan critical. If you own a business, or have gathered assets, the documents needed to make a well thought out succession plan will vary depending on the type of business and the type of ownership you have in the business. Additionally, the succession plan will very likely need an estate plan. And note, just because you’ve made a plan, you are always free to change your mind as events transpire.

The Dirty Dozen Checklist to Drafting an Effective Business Succession Plan

This article briefly discusses the general tasks to make a succession plan and its dependence upon a well thought out estate plan.

To clarify the interplay between business succession and estate planning, Ken Begun, a Certified Specialist in Estate Planning, has graciously provided the estate plan sections of this article. Ken is a fellow John F. Kennedy College of Law alumnus located in San Ramon, California.

12 Points to Make Your Succession Planning Day

1. What is the long-term strategic vision for the business?

This stage is critical because this is the foundation upon which the succession strategy is based. Whatever the owner’s final goals may be, the strategy is to conserve the asset into succession by protecting it from unintended tax consequences, excessive tax liability, and court intervention. It is always better to avoid litigation, the probate process, and the substantial fees and costs included.

2. Will the owner or owner’s spouse want to continue to draw income from the business after departure?

Generally, owners expect to collect revenue from their life’s work or business investment, as do those who helped build it such as spouses, children, and other beneficiaries.

However, some transfers of business and asset interests may disqualify the transaction from tax protection liability. An incorrectly executed transfer could negate capital gains protection, or subject real property to property tax reassessment. Thus, without proper planning, the owner or spouse may not have the option of keeping the business or assets.

The reader must take note that a thorough analysis, let alone a complete listing, of all the potential issues that may impact the tax consequences of a succession plan is beyond the scope of this article.

3. How will the business continue without the daily involvement or participation of the current owner?

This is the issue that many businesses face with the “unintended partner” or uninterested owner. Generally, this occurs when the person in charge can no longer maintain active involvement, and a spouse, child, or heir takes over the involved person’s activities, the unplanned succession. Occasionally, but only rarely, is the successor capable of continuing the business successfully. The risks can include tension with the remaining co-owners, irreconcilable differences between the unintended partners, or simply a difference of goals for the ongoing concern.

A well thought out and planned succession plan can prevent the stormy situations brought about by an unplanned succession by naming a qualified and willing successor who is interested in the ongoing success of the business. A planned succession makes for smoother transitions with minimal disruptions to the business and its profitability.

4. Will shares of the company or its business assets need to be sold to provide an income to beneficiaries, or to leave an inheritance to the owner’s heirs or beneficiaries.

5. Will the business assets or the interested persons be required to pay creditors claims against the business transfer or the owner’s estate?

6. Does the owner wish to gift all or part of the company to children, other heirs, or charity? What form should the gift take? Should the gift be made during life (inter vivos) or upon death? And what are the transfer tax consequences?

7. Whom does the owner want to own the business as part of the succession plan?

One important benefit of building a lifelong legacy is the privilege of choosing to whom the business transfers. In multigenerational businesses, conflicts can arise between beneficiaries or heirs because the owner may not have clearly defined his or her wishes regarding transfer of the asset or assets. Is there a key employee who may succeed to the business? On what terms? There may likely exist business partners that have their own expectations of the business transfer. Experience shows that clear and unequivocal communication by the owner to the interested people tends to avoid most transfer challenges.

8. Does the organizational structure or type of business entity need to change as part of the business succession plan? Unsurprisingly, most licensed businesses require re-licensing of new owners by the appropriate agencies. Indeed, the title of assets and property can lead to disturbing surprises, potentially preventing succession of the property to the person or persons the current owner intended.

9. Is there a plan to deal with estate taxes on the owner’s estate and the impact of such taxes on the business? Will estate taxes be a concern? If so, are there ways to minimize estate taxes? Are there advantageous ways to pay inevitable estate taxes?

10. Are professional advisors needed to help develop the business succession plan?

In preparation to draft a business succession plan, a business owner should consult with an experienced business law attorney, an estate planning attorney, and an accountant to protect the business assets, from unintended risk and costs and mitigate potential litigation. The consulting attorneys can also present strategies to consider for protecting business and personal assets.

Additionally, a business valuation professional may be important. Are the business’ books and affairs tidy enough to make valuation an easier and cheaper endeavor?

11. What estate planning documents will the owner and the owner’s spouse or partner need to execute to carry out the business succession plan?

A quick list of documents often used to make a business succession plan:

1. Bylaws, the Operating Agreement, or Partnership Agreement
2. Ownership, Equity, or Stock Agreement
3. Shareholders Agreement or Buy-Sell Agreement
4. Family Limited Partnership Agreement
5. Life Insurance (including life insurance trust)
6. Will
7. Durable Power of Attorneys
8. Trust
9. Advance Healthcare Directives

12. Get Started

An owner who continuously kicks the can down the road of succession and estate planning is inviting unpleasant surprises in civil or probate court for their heirs. Now is the time to stop thinking and start acting.

The first step is to think write down the long-term goals for the business to keep succession planning on track. Leaving a legacy is many things to different people, it is important for owners to define theirs will be.

The second step is to consult with the professional team: business/ corporate attorney, estate planning attorney, and accountant to integrate the plan. This teamwork approach helps to overcome the difficult thought of letting go and fulfilling the plan to “Begin with the end in mind.”

The disclaimer: The information in this brief article is for general informational purposes only. The information in this article is of a general nature, it is not intended, nor should it be taken as sound advice for any particular legal issues. Each succession plan, estate plan, or contract is rendered unique due to the parties, the circumstances, and the individual facts of the given transaction. As such, the information in this article should not be taken as legal advice regarding any specific situation the reader may be facing. Specific questions should be discussed in a consultation with your business law attorney.

A client with a matter in another jurisdiction introduced me to a busy, and apparently successful, colleague. I believe he was located in NoTechistan. Billing didn’t happen until the weekends and emails with attachments were discouraged because they were frequently lost or unprintable. When I asked what billing program and PDF compiler they were using, “NONE” was the answer.

I was stunned, I thought I was behind the times because I’ve only recently moved to the cloud for my billing/practice management. I found it genuinely painful to test multiple cloud-based applications and giving up the trusted, yet inflexible, billing program I’d been using for ages.

I’ve also started evaluating Dragon Naturally Speaking and Siri to further automate my practice. More to come….

Imagine not getting a couple of stitches now, later resulting in a gruesome infected injury that may require amputation. Yes, I’m exaggerating. However, consulting an attorney if you think you might be facing a potential legal issue could save you an incredible amount of time, money, and peace of mind.

It’s a business decision. Pay a few hundred dollars now, for a consultation that could prevent or mitigate legal action, or multiple thousands (or millions) of dollars later for a lawsuit?

In my quest to keep abreast of technology in the legal profession, I suggest both the Prism Legal and ROSS Intelligence blogs.

I like how Prism Legal keeps track of legal technology developments and how they are affecting our profession and I check it out with some regularity. While called the “Legal Tech Corner,” the ROSS blog includes more general legal interest topics. Although they did recently put out an article about how Artificial Intelligence will impact practicing law – it was very eye opening.

Not in the Web 100, I recently came across an article about law office management. This is especially difficult for those of us in practice by ourselves. 14 Law Office Management Tips to Run an Effective (and Legal) Business does a great job of simplifying office management to its basic parts. It’s so good that you can easily overlook the fact that the article is also an advertisement for Process Street product. (You know a company is good when they actually provide useful information while trying to sell their product.)