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The Importance of Succession Planning

Originally published: 05.01.09 by Mike Coyne

Whether you are a sole owner or in a partnership, considering estate planning issues now will ensure that your business survives and prospers later.

This is an article about estate planning, but it is not an article about wills and trusts. For a business owner, the most important estate planning does not require a lawyer or a financial planner. It does, however, require an owner with a clear vision of his goals and objectives for his family and his business. If you have not yet addressed the disposition of your business following your death, here are some thoughts on how to approach the issue.

Businesses with Multiple Owners

If you have partners, all of you have a vested interest in resolving estate planning issues related to the business. Frequently, partners are motivated to have a buy-sell agreement that requires redemption of shares upon death so that the surviving owners do not have to "deal with the deceased owner's family." Assuming that there is not another member of your immediate family involved in the business who you would like to succeed you, then an agreement for redemption upon death is good for

both your partners and for your family.

Unfortunately, not all buy-sell agreements are created equal. A good buy-sell agreement will have a predetermined method for fixing the redemption price. For example, the agreement might contain a formula for determining value or it might require a binding independent appraisal. If the agreement calls for an appraisal, you should consider having language in the agreement giving specific instructions to the appraiser. For example, your agreement might instruct the appraiser to disregard discounts in the value for a lack of marketability of the stock or because your stock represents a minority interest. (Such discounts frequently decrease the value of shares by 40% or more!) Instead, your agreement might instruct the appraiser to appraise the value of the company as a whole and determine your value by multiplying the company value by your ownership percentage.

Some agreements call for the partners in the business to determine the value on an annual basis. If you have such an agreement, you should have a failsafe or default method for determining the value if the partners have not set the value in accordance with the agreement. A price determined after your death may not be very objective!

In addition to a specific method for determining the price, your agreement should describe the specific payment terms and, if possible, some form of security to assure that your family is paid for your interest in the business. If there is insurance funding the buy-out, we typically require that all insurance proceeds be paid in a lump sum at the time the shares are redeemed.

If you have a member of your immediate family involved in the business who would like to succeed to your ownership, this needs to be addressed by all of the partners in writing. Your agreement might specify that you have the right to leave your shares to a specific individual, or in the alternative, to have your shares redeemed at the time of your death.

Sole Owners

If you are the sole owner of your business, you face a much larger challenge. The survival of your business requires that you have a detailed and current succession plan in writing. First, you need to identify an individual to take your place as chief operating officer. If the job is too big for one individual, you might consider identifying a management team. Your successor should have specific instructions to either maintain the business for the benefit of your family or to maintain the business with the intention of selling it as soon as reasonably possible following your death.

Sometimes it makes sense to have a written agreement with your successor officer or management team. The agreement might include some form of incentive compensation arrangement to assure their best efforts on behalf of the company. The agreement may also require successor management to maintain relationships with your current accountant and attorney, thus assuring that extra sets of eyes are watching the business for the benefit of your family.

If you plan to have your spouse or children take over operation of the business, be sure that you carefully delineate the responsibilities of various members of your family. Objectively evaluate their capability for handling various aspects of the business. If one or more members of your family will need assistance, identify those individuals in your organization who could assist and mentor them.

I personally believe that it is important to discuss your plan with both your family and with key employees. In doing so, you may find that there are objections or concerns that you have not yet considered or that will make your proposed plan unworkable. Additionally, you might find other problems within your organization with which you weren't aware that can be addressed immediately.

Begin committing to writing a detailed description of your duties as owner of the company. Don't assume that anyone in your organization is aware of all of the things that need to be done to maintain the success of your business. It is also helpful to develop written procedures and processes that can be easily adopted by your successor. Additionally, you might consider putting together a calendar that shows when different types of business issues must be addressed. The more information you leave the successor, the better the chance that your company will survive and prosper.

About Mike Coyne

Mike Coyne

Michael P. Coyne is a founding partner of the law firm Waldheger Coyne, located in Cleveland, OH. For more information of the firm, visit: www.healthlaw.com or call 440.835.0600.

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