Do You Have a Succession Plan for Your Business?

By Karen Axelton

The recent illness of Apple CEO Steve Jobs has sparked calls by stockholders in the company that Apple should publicly name a successor. As Jobs took his second leave of absence from the company to deal with health issues, the company’s stock dipped amid rumors and concerns.

You may not be Steve Jobs, but if you suddenly were unable to run your business, what would happen? Even if they are on a smaller level than a world-famous CEO, small business owners need to plan for succession.

Succession planning is of particular importance to a family business, but as the Jobs example shows, it matters to every business. Here are some factors to consider in creating a succession plan.

Key man insurance: If you or another key person with ownership in the business, such as a partner or longtime employee, should die, what would happen to his or her shares? Without key man insurance in place, the shares would most likely pass to the person’s survivors—which means you could suddenly find a spouse with no business experience having a major voice in company decisions.

To avoid this risk, purchase “key man” life insurance on all owners/partners who own substantial stock. In case of death, the insurance pays the business an amount sufficient to buy back the deceased’s shares. (Make sure that your stock agreements are written in such a way as to allow the business this right.)

Delegation: Death isn’t the only thing that can throw your business for a loop. What if a serious illness laid you low for a month or more? What if you had to recuperate from a heart attack or were in traction following a car accident? Every business owner should have a backup plan in which others at the business are trained to step into his or her shoes if need be.

Many entrepreneurs fight the idea of delegation because they think no one can do things as well as they can, they don’t like giving up control, or it seems faster in the short run to keep doing things yourself than to train someone else. If you’re out of the picture, however, this shortsighted approach can bring your business to its knees. Plan now for who can take over what tasks in an emergency.

Asset transfer: Succession planning doesn’t always involve an unhappy event, of course. Maybe you’re getting close to retirement and want to transition out of your business. There are several ways you can transfer assets and ownership of the company, including selling the company to your staff using an Employee Stock Ownership Program (ESOP), selling it to a third party, or selling your share to your partners who remain in the business (using a buy/sell agreement).

If you are getting ready to consider one of these  options, speak to your attorney and accountant to develop a plan for maximizing the value of the business. This will ensure that you get the best possible price for it to help fund your retirement.

Family matters: If you want the business ownership to pass to your spouse, children or other family members, start now on a plan to ease them into the business if they aren’t already working there. This way your family members will be prepared to deal with the issues that arise and the greater responsibility when you’re no longer involved in the business day-to-day.

Image by Flickr user Johan Hansson (Creative Commons)

This entry was posted on Tuesday, March 15th, 2011 at 6:00 am and is filed under Business Law, Compliance, Small Business. You can follow any responses to this entry through the RSS 2.0 feed.


You can leave a response, or trackback from your own site.