There is an endless amount of information available on the internet on the 'dos and don’ts' of running a family business. While the plethora of advice on this broad topic varies, business succession planning is a consistent theme; particularly, why it is so important for family businesses and businesses generally to have one?
What is a business succession plan?
The business succession plan that is appropriate for your business will depend on a number of factors such as the type, the size and the structure of the business.
A properly considered succession plan will (with the assistance of the appropriately drafted documents) cause a course of events to take place once you decide to exit the business voluntarily, or if something happens which forces you to exit the business (otherwise known as a triggering event).
Examples of triggering events include total or permanent disablement, death, divorce and bankruptcy.
In these circumstances, the succession plan would operate for the protection of the business from becoming embroiled in disputes which are personal and do not strictly relate to the business.
There are different ways to structure a business succession plan. However, the plan usually involves owners of a business reaching some agreement about what will happen to an owner’s interest in the business when a triggering event occurs, or when an owner voluntarily decides to leave the business.
Some examples are:
this is a contract between the owners of a business in which they agree on how their respective interests will be transferred to the other upon a triggering event occurring, how that transfer will be funded and timing requirements.
They usually contain a put and call option whereby upon a triggering event occurring, the sale of the affected owner’s interest in the business is forced and the ongoing owner is required to purchase the affected owner’s interest in the business.
Most commonly, this purchase is funded by way of insurance which is specifically designed for this type of circumstance.
This is a contract which is entered into between the shareholders of the company. It deals with how shares in the company are to be transferred upon a voluntary or involuntary exit from the business, how the transfer of shares will be funded, voting rights and powers and other administrative matters which relate to the operation of the company.
There can be tax implications which must be considered when determining which type of succession plan is right for your business.
You should therefore obtain specific advice from a qualified accounting professional.
Why does my business need a succession plan?
Succession planning is important because no-one can predict when something might happen to cause a business partner to have to leave the business suddenly.
Taking action and discussing with your business partners what business succession planning options will be right for your business and putting such a plan in place is essential.
Greer Oliver is a lawyer in the commercial and corporate team at Colin Biggers & Paisley.