Succession planning in Utah is an often overlooked aspect of business ownership. This is a problem because it creates unnecessary risks. When key employees leave the business for whatever reason, the business can be detrimentally affected and go downhill quickly. But with a succession plan in place, leadership remains intact and harm to the business can be avoided.
At Anderson I Hinkins, our estate planning lawyer based in South Jordan, Salt Lake County handles business succession plans for business owners. We aim to keep your business successful regardless of any changes you face over the years. Contact us at 801.930.0290 to schedule a Free 30-minute consultation and to make sure your estate plan has all the tools you need to safeguard yourself, your loved ones, and your business.
What Is Business Succession Planning?
Business succession planning involves developing a strategy for what happens when an owner leaves the business, retires, or passes away. It sets out step-by-step instructions for what to do, specifically when it comes to a transfer of ownership. Business succession plans are most critical for small and family-owned businesses and should be included in the owner's estate plan.
Effective business succession planning ensures an organization continues to function following the exit or death of an owner, minimizing the associated costs and disruptions to the business while ensuring its longevity. In sum, business succession plans – if drafted with the right language – minimize risks.
Common Risks Businesses Face without a Succession Plan in Utah
Knowing the risks can help you avoid them. Many risks exist when business succession plans are not created for a small or family-owned business. Some of the more common risks include:
- Diminished value of the business. A business's success is often based on the relationships that are nurtured over the years. When a trusted owner dies or exits the business, clients and customers want assurances that the business will maintain the same level of quality services, or else they will leave, too.
- Loss of trust. If you do not have a business succession plan in place, transitioning from one owner to another will take more time. But time is money, and the longer it takes to recover from the loss of the owner, the more likely clients, customers, employees, and investors will lose their faith in the business and go elsewhere.
- Loss of experienced and skilled employees. If leadership fails due to a lack of a succession plan, you put your greatest resource at risk: specialized employees. Skilled and experienced employees are in high demand and so they may look for professional opportunities elsewhere.
- Vulnerable to competitors. If a succession plan is not in place and a hungry competitor becomes aware of the situation, they could plan to take over your business to increase their market share.
- Potential for conflict. When a business owner dies or exits a business without a succession plan in place, the core values and mission of the business may be questioned. Without the right leadership and quick decision-making necessary to keep the business intact, conflicts may arise among personnel, employees, and others.
- Unqualified new leadership. In the absence of a succession plan, mistakes may be made in the rush to fill the gap. If the new person hired to fill the loss is not capable and qualified, it can facilitate all of the above risks.
Again, these risks are just a few examples of what a strong, solid business succession plan can help you avoid.
Types of Business Succession Plans
There are two main types of succession plans: long-term and emergency.
Long-term Succession Plans
Long-term planning involves proactively looking ahead and preparing for an eventual transfer of ownership, such as when an owner retires. It often requires identifying and developing talent over an extended period to prepare individuals to step into key leadership roles.
A long-term business succession plan should be reviewed and updated regularly based on the company's changing needs.
Emergency Succession Plans
An emergency succession plan manages a sudden change of ownership. For example, an owner may die unexpectedly, and this event can send the business into a downward spiral.
An emergency succession plan considers the legal transfer of ownership and interim measures to follow while longer-term plans are developed, such as the appointment of an acting successor.
How to Choose a Successor for Your Business in Utah
Choosing a successor for your business often depends on the type of business you own and its legal structure.
A succession plan for a family-owned business may identify a younger family member as the successor. In this case, family dynamics often come into play, on top of practical business considerations.
If the business is not family-owned (or to account for various family dynamics), a succession plan may provide for the sale of the deceased's business interests to another partner, an employee, or a third party, like a competitor.
Tips for Choosing a Successor
When choosing a successor for your business, start by looking carefully at the strengths and weaknesses of any potential successors, as well as their desire to move into an ownership or senior leadership position.
Relevant considerations include assessing and identifying training and mentorship opportunities for potential successors to ensure they are prepared to take on the role when the time comes.
You may also want to seek professional advice from a lawyer as to your options. It's best to do this as soon as possible, as business succession planning can be a complex and time-consuming process requiring detailed consideration.
Documents You May Need for a Business Succession Plan
Business succession planning can be complex, involving the preparation of a range of documents.
It may require existing governing documents – like a partnership or operating agreement or articles of incorporation – to be updated. It may also involve drafting new documents including:
- Appraisals or business valuations
- Entity purchase agreements, where a company takes out insurance policies on each partner so that in the event of a death, the insurance payout is used to purchase the deceased partner's shares
- Buy/sell agreements, enabling the surviving partners to buy the deceased's partners shares from his or her family
- Employee stock ownership plans, allowing employees to purchase the departing owner's interest via shares
- Management buyout plan, allowing the management team to buy the company
The circumstances of a business and its specific succession plan will determine the documents needed to execute it. A business succession lawyer can advise you on the relevant paperwork in your situation and draft any technical documents for you.
Key Elements of a Business Succession Plan
Business succession plans will and should be unique to your business and your needs. That said, there are some common, key elements that should be included in any and all business succession plans.
- Strategic Plan. A strategic business plan explores the current state of the business and its future, including potential risks that should be considered and proactively addressed.
- Financial Plan. This plan should determine financial goals and resources as well as financial assets, cash flows, taxes, and projected growth, among others specific to your business.
- Ownership or Leadership Transition. Multi-year strategies are needed to address who will own the business in the future and how the transition of ownership will be handled or proceed.
- Successor Identification. Three potential outcomes for a transition exist: (1) family member(s); (2) employee(s); or (3) a third party. A strategy must be put into place for the option you choose. Things like skills, impact on the business, resources, and more must be considered.
- Governance. If your business is a family-owned one, you want to address what governance will look like: does it involve an advisory board or board of directors or is it more like a family council?
Challenges to Business Succession Planning in Utah
Business succession planning is not without its challenges, especially when it comes to family-owned businesses. Issues for consideration include:
- Family dynamics
- Lack of a competent heir within the family
- Tax issues, such as the transfer of ownership within a family, can generate large tax liabilities
- Conflicting family goals or ambitions, where family members hold different visions for the future of the business
By obtaining professional advice when creating your business succession plan, you can consider these issues and find out how best to manage them in your situation.
Get a Smart Business Succession Plan: Contact an Estate Planning Attorney in South Jordan, Salt Lake County Today
Risk reduction is what a smart business succession plan is all about. At Anderson I Hinkins, our business succession planning attorney in South Jordan, Salt Lake County will take the time to build a solid succession plan intended to significantly reduce risk. Contact us today by filling out the online form or calling us at 801.930.0290 to schedule a Free 30-minute consultation.