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  • August 19, 2020

    Tips for an Effective Business Succession Plan

    A succession plan for a business is an often overlooked, yet essential area of business law. Maureen O’Leary gives tips on setting up a successful plan and getting clients to look ahead.

    Maureen O'Leary

    We know there are many different types of business lawyers. Everyone has their own areas of expertise, from business transactions to business litigation.

    An often overlooked, yet essential area of business law is where business law meets estate planning – at the intersection known as business succession planning.

    Business Succession Planning

    Business succession planning is planning ahead for changes in the ownership and management of a company after the owner becomes incapacitated or dies.

    Maureen L. O’Leary Maureen L. O’Leary, Marquette 2008, is the president of Willms-O’Leary S.C. in Thiensville, where she focuses on trusts, estates, business, and tax law.

    Ideally, all estate plans for business owners will include a business succession plan, but this is not always the case. An estate-planning lawyer might assume a business lawyer is handling all business-related matters, or a business lawyer might assume an estate-planning lawyer is preparing a succession plan. Or, perhaps a client does not want to address succession planning (most people would rather go to the dentist than work on their business succession plan).

    However, a business’s succession plan can make or break a business’s transition upon the loss of its owner.

    Business succession planning is particularly important right now for the baby boomer generation. According to the U.S. Census Bureau, baby boomers (individuals born after World War II from 1946-64) are the second-largest age group in the country, with an estimated 73 million members. They currently range from approximately 56 to 74 years of age.

    Baby boomers are facing issues like retirement, health issues, and estate planning, and many are business owners. This creates a need for lawyers who can help their clients with business succession planning.

    How to Get Started

    There is no “one size fits all” business succession plan. Every plan must be customized for the particular business and its owner’s estate-planning objectives. It is very helpful to coordinate this planning with the business owner’s core team of advisors, such as accountants and financial advisors.

    Consider whether the business owner intends to sell the business during his or her life or keep the business until death. If there are no concrete plans to sell the business during the owner’s lifetime, what does the business owner expect to happen upon his or her death?

    This can be an eye-opening question for a business owner to consider. If the business owner’s heirs are not in a position to continue running the company successfully, the business owner’s death may force a sale of the company. However, selling a company right after the death of the owner is often not the best time to sell a company and can result in a sale price and terms that are less than ideal.

    If there are plans for a business owner to sell the company during life, a business lawyer is often essential in helping the client plan for and close the sale at the best time and on the best terms possible.

    However, if a client makes an intentional decision to try to keep the business in the family beyond his or her life, a business succession plan can be the key to making this a successful transition.

    Questions to Ask Your Client

    If a client wants to plan to keep the business in the family, a good business succession plan begins with asking a lot of questions, such as:

    • Does the client want his or her heirs to inherit or buy the company?
    • Will the client or the client’s spouse have a continued need for business income after retirement or after the death of a spouse?
    • Should more than one heir assume ownership and control of the business? If yes, should all heirs be treated equally?
    • Are some heirs active in the business and others less involved?
    • Should the transition begin upon the client’s death or should it begin sooner?

    Components of a Business Succession Plan

    Once a framework has been developed that captures the client’s wishes, it’s time to draft the documents that effectuate the client’s goals. Here are examples of documents that might be part of the business succession plan, and their purposes:

    • LLC operating agreements or corporate bylaws – to implement effective management and decision-making processes.
    • Employment agreements – to assure employment of key employees and to help retain good employees.
    • Buy-sell agreement – to sell shares to pre-selected buyers.
    • Stock restriction agreement – to shape future stock ownership and encourage family stock ownership.
    • Promissory note – to finance a sale of the company to the next generation.
    • Trust agreement(s) – to bequeath a company to the next generation, or to give options to purchase to heirs. Trusts can also be used to help protect company stock from outsiders.
    • Voting trust – to give stock voting rights to a designated person or persons even if there are many more owners.
    • Deferred compensation agreement – to provide ongoing cash flow to a retired owner or his/her spouse.
    • Business valuations – to establish stock value for transfer purposes.

    Conclusion: A Necessary Part of Business Ownership

    Business owners need a team of trusted advisors to help them with all facets of owning a business. A business attorney can maximize their value to a client by educating and assisting them with business succession planning.

    Check Out WisLawNOW

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    More than 40 Wisconsin legal blogs have already joined WisLawNOW to expand their reach, showcase expertise, and contribute to this digital collection of legal information.

    This article was originally published on the State Bar of Wisconsin’s Business Law Blog. Visit the State Bar sections or the Business Law Section web pages to learn more about the benefits of section membership.

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