How to make sure your succession planning succeeds

How to make sure your succession planning succeeds

By adapting the Greek philosopher Heraclitus’s words, the reality for business owners becomes apparent: change is the only constant in business.

The main issues

A critical period for a business that is wholly or substantially family owned and operated is the time when the principal of a business departs, whether because of retirement, new horizons, disagreements, illness or death and successfully managing these changes can often lead to the renewal of a business.

The value, and even viability of such a business, can be reduced dramatically if the business fails to make a successful transition to new ownership when these circumstances arise.

A lack of planning can reduce the value and even the viability of a business, particularly for family-controlled businesses whereby generational conflicts can dominate the succession process.

The source of the conflict can vary greatly and may arise gradually over time or seemingly overnight.

Business succession planning issues between shareholders, unitholders or family members arise from lack of or inadequate communication and/or documentation setting out the intentions of the parties concerned.

What is a business succession plan?

A business succession plan is a legal arrangement which documents what will happen, and how the business will continue, on the occurrence of certain defined succession events.

Key considerations include;

  • choosing a successor for the business,
  • providing for insurable events, such as death or total and permanent disablement,
  • providing for non-insurance related events, such as retirement, resignation, business partnership break-up, bankruptcy of business principal and
  • transfer of business interests such as shares in a company, units in a partnership, especially in a non-family business succession plan valuation of business interests.

Preparation of appropriately tailored legal documentation, (shareholder agreements and similar and buy/sell agreements), reviewed regularly, can ensure that the objectives of the succession plan are realised including covering circumstances such as death, total and permanent disablement and trauma/critical illness.

Buy/sell agreements coupled with insurances help ensure that the remaining principles can afford to pay for the interest in the business and to protect surviving business owners from the deceased’s beneficiaries and their associates.

Buy/sell agreements are often drafted as put and call agreements with the remaining principals being given an option to call for the purchase of a departing shareholders interest in the business and a departing shareholder (or their LPR) being able to put their share in the business to the remaining business owners.

Voluntary departures (retirement, new horizons or disagreement) can also be dealt with by agreement, and often shareholders agreements (or similar) can be drafted or amended to deal with the transfer of ownership in these circumstances.

Exit strategies can be varied and may include a sale to the remaining principals, a third-party disposal of all or part of the business, a merger (for example with a customer or competitor) or an orderly winding-up of the business venture.

Non-insurable events can create funding problems for the continuing principals.

Appropriate use of vendor finance type arrangements with security over property or other assets may be appropriate where the outgoing principal effectively lends the continuing principals the money to purchase the outgoing principals share in the business at appropriate commercial rates.

Key observations and advice

Change is inevitable, especially when it comes to operating a business. Change can also arrive without any warning.

Our firm recently acted on a complex multi-site business breakup that will end in the forced sale of businesses and assets partly because, following an inevitable shareholder fallout, the business partners failed to implement shareholder/ unitholder agreements and did not have clear rights when a trigger event arrived.

To ensure the best outcome, your commercial lawyer needs to work closely with your accountant and financial advisors to prepare suitable legal strategies and documentation to assist family groups and owners navigate change.

In the previous example, advice was provided, and documents were prepared as part of a business succession plan. Unfortunately, the parties did not implement the complete strategy or sign all recommended documents.

Make sure your legal firm provides you with specialist advice to implement strategies and documentation to assist with a smooth transition to new ownership when the time comes.

Estate planning documentation should always marry with a business succession plan for family ventures and where appropriate.

Take the time to seek out specialist commercial litigation lawyers who are well experienced in advising family members, majority and minority shareholders, and company directors, on options available should some issues become contentious.

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