Unless a small business closes when its owner retires or dies, ownership, management and control of that business is going to move (succeed) to someone else.
The best business succession occurs in the context of a plan. And the best business succession plans are individualized, often facilitated by outside professionals, and usually include five key components.
In the context of business succession planning, I refer to existing owners as the “senior generation” and the new, impending or prospective owners as the “junior generation” even though age and roles do not always correlate with each other.
A good business succession plan will be in writing and will ensure the business’s viability (financial existence) while aligning all stakeholders’ incentives, being fair to all stakeholders and capturing the senior generation’s wisdom and the junior generation’s energy and ideas.
Human memory is a finicky thing. Even when we do our best to remember, we do not always keep the facts straight. This is particularly so in the context of the complexities of business succession. A good lawyer can capture in writing even the subjective measures that may be benchmarks in a succession plan. Thus, first, succession plans should be in writing.
Second, it is rather easy for a business succession plan to simply be a buy-sell arrangement. However, for businesses with large overhead and small returns (compared to the investment size) like farms, grain elevators and other businesses that have large inventories and resources on “standby,” it is difficult or impossible for the senior generation to simply sell the business straight-out to the junior generation. If the junior generation is going to pay “full retail price” (if that is even financially possible), the junior generation may as well buy any other (even competing) business. Simply put, the plan must include considerations to increase the likelihood of the business’s future existence and success.
Third, the plan must balance the increased likelihood of business success with fairness to all stakeholders. Those stakeholders often include family members who are not involved in the business or key employees who will not be owners someday. Being “fair” with these stakeholders does not necessarily mean being treated equally financially, but it almost always means very large amounts of communication and buy-in.
Fourth, the best way to ensure “buy-in” of all stakeholders is to align incentives. The best business succession plans provide that everyone does better financially when the business does well financially (sometimes even years after ownership has transferred). This way, everyone is rowing the boat in the same direction.
Fifth, to get that confidence for everyone (even without any direct/immediate involvement) to “hitch their wagons to each other’s wagons,” immense trust must be built among all stakeholders. For most businesses, this requires at least a few years of co-existence/co-ownership/co-management between the senior generation and the junior generation. Good attorneys help to organize that process, sometimes even down to details like where different people physically sit in the workplace to facilitate that best mixture of senior generation wisdom and junior generation enthusiasm and ideas.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at [email protected] or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.