Every closely held business should have a succession plan in place. While many owners of small businesses may not find it pleasant to think about a time in which they are no longer able to work, employees and family members are depending on them to develop a careful plan.
Without a succession plan, contingencies can result
Without a succession plan, contingencies can result, Davenport Evans lawyer Mike Srstka explains. For example, employees may be out of work during a business shutdown as family members and business partners engage in litigation over the ownership of the business. Family members may be forced to sell inventory and real property at unfavorable prices, struggle through the process of paying business taxes, and they may even be surprised when creditors unexpectedly appear. While transition of ownership and control of a small business is often challenging under the best of circumstances, business owners should plan ahead to make the transition process go as smoothly as possible and to avoid leaving friends and family to pick up the pieces.
Small business owners should consider whether there are key employees or family members that are presently willing and able to take an ownership interest and management role in the company. Before selling an equity interest in a business, however, an owner should consider the effect that the sale will have on the management and control of the company. Once an owner gives up a majority interest in a company, it is very difficult to undo the resulting loss of control. Fortunately, there are ways to separate ownership and control of a business through voting agreements or similar arrangements in which the control of a business is phased out over time rather than transferred at the point of sale. This is especially important when the buyer makes payments on the equity interest over multiple years.
Small business owners work hard to build companies that provide important services and employment opportunities. It’s important to pause and to consider ways to protect the long-term viability of your company.