Why Succession Planning is Important

Business succession planning is a crucial, but often overlooked, element of business ownership. Many business owners are so focused on growth and maintaining company success that they never have time to consider what will happen to the business after they leave or retire until the time comes. While successful transitions can and do occur with little forethought or preparation, having a succession plan in place eliminates risk, worries, and confusion when the time arrives.

What is Succession Planning?

Business succession planning is a legal document that guides a business through a change in ownership. It covers the logistics of ownership transfer as well as the accompanying financial decisions that will need to be made about the transfer.

Succession plans require conscious thought and decision-making about what happens to a business when the principal owner(s) exits the business, whether the exit is planned or unplanned. A well-defined succession plan will provide step-by-step instructions for the sale and leadership transitions of the business. Ideally, the succession plan will benefit all parties involved including the owner and family, the employees, the successor, and the business itself.

Why is succession planning important?

Succession planning is important from operational as well as emotional standpoints. Not only does succession planning ensure the owner’s wishes are respected in regard to business continuity, but it also provides peace of mind to the owner’s remaining family members, employees, shareholders, investors, and customers. All of these interested parties know that there is a plan in place for the successful transition of the business which can greatly ease any worries they may have about the changeover. This can help reduce staff turnover and investor pullbacks, ensuring business continuity and helping to keep the business stable during the transition.

What are the Benefits of Succession Planning?

Although succession plans are most often associated with an owner’s retirement, they are useful even from the earliest days of the business. A succession plan will ensure business continuity in the event of an unexpected disability, illness, or death among the ownership. These plans are particularly recommended for businesses that:

• have employees beyond immediate family members
• have repeat or ongoing contracts with clients
• have a successor in mind
• have complex systems on which the successor will need to be trained

In general, the larger or more complex the business, the greater the need for a business succession plan, regardless of how close the owner is to retirement.

If you are wondering if your business needs a succession plan, ask yourself, “What would happen to my business if I was unable to run it?” Would the business survive? Is anyone available to take over the day-to-day operations? How would your family or employees be affected?

Succession Planning Options – Ways to Sell or Transfer Ownership of Your Business

There are several options for selling or transferring ownership of a business. The four most common methods are:

1. Sale to an ESOP. Employee Stock Ownership Plans are a way to sell the business to your employees. Owners sell their shares of the business to an ESOP trust which holds those shares on behalf of employees. Shares are allocated to employees as they become available as part of their employee benefits package. There are strict legal requirements that govern ESOPs to protect employees and owners, but this option is very popular for family-owned businesses and those that want to encourage an ownership culture. There are also significant tax benefits to the ESOP owned company and owners who sell to an ESOP.
2. Sale to Strategic Buyer. Strategic buyers are known to you. It may be a competitor looking to expand or business already in your industry who sees the value of your company. Strategic buyers may be willing to pay more for the business just for the opportunity to own it. It is important to have an experienced mergers and acquisitions attorney representing you to mitigate your exposure risk if the deal falls through. Without these protections, a would-be buyer could walk away with vital insider information about your company.
3. Sale to a Financial Buyer. This is the most common type of business sale. These are outside buyers who are usually financing the purchase with a bank loan. They will usually pay fair market value or close to it and they may want you to stay on during the transition period. They may even ask you to retain some equity in the business or finance some of the purchase price. Private equity firms, small groups of independent buyers, and individuals all make up this group of buyers.
4. Sale to family or other shareholders. If you have partners or family members, they may want to buy the business. In a partnership situation, you may already have a buy-sell agreement on hand from when the business was formed. Passing the business on to an heir or selling it to a family member is popular with family-owned businesses, but you will need to establish a succession plan that clearly delineates who will take over the business, what role, if any, other family members will play in the business, how and when the transition will occur, and what the future leadership structure will look like. Otherwise, you run the risk of legal challenges to the transition and operational challenges as those legalities get worked out.

How Aegis Fiduciary Services Help

Aegis Fiduciary Services is an ESOP transaction trustee. We help owners establish ESOPs, create succession plans, and manage the transition process. As an ESOP fiduciary trustee, we manage plan assets and monitor plan performance as an independent third-party on behalf plan participants.

To learn more about ESOPs as a succession planning option or our services as an ESOP trustee, contact us.