CALIFORNIA SMALL BUSINESS SUCCESSION PLANNING
Sept. 18, 2015
If you own a small business or a share of a business, it may be your most valuable asset. Unfortunately, many small businesses do not survive the retirement or death of their owners. Thus, responsible succession planning, meaning planning for the transfer of ownership and management after an owner leaves, is key to a business’s continued success.
If there is confusion and uncertainty during a period of transition, small businesses may lose their customer base and thus lose value. It is essential to have a succession plan to make sure that the transition is as smooth as possible.
If a business does not have a succession plan in place at an owner’s death, the owner’s shares in the company will go to his or her heirs as part of the estate, be absorbed by shareholders, or a combination of the two. Often, if a detailed succession plan is not in place, family businesses do not survive the transition.
If family members inherit the business, this can lead to fights among relatives. Those who have been involved in actively running the business may feel entitled to bigger shares. If the business lacks sufficient funds to pay taxes, the family may have to sell the business.
Unplanned succession often causes periods of instability, which may cause employees or the client base to abandon the company. If the owner’s shares are to be absorbed by the other shareholders, they might not have the financial resources to purchase the shares of the deceased or retiring shareholder, and might have to sell part or all of the company to an outside party.
Generally, succession planning involves either retention planning or a buy-sell agreement. In retention planning, the owner elects to keep the company or the shares within the family after retirement or death. The owner must name the family members who will control the business’s assets and manage the company.
A buy-sell agreement is a contract providing that a specific event or events will trigger the transfer of the business. Triggering events commonly include the owner’s retirement, disability or death. If a triggering event occurs, then the parties named in the buy-sell have the right of first refusal. This means that they have the first opportunity to buy out the owner’s shares, or they can elect to sell them to someone else.
Any business entity—partnerships, LLCs, corporations, etc.—can be transferred with a buy-sell agreement. Buy-sells are binding on third parties, including the family members and the estate of the original owner.
It is essential to the continued functioning of your small or family-owned business that a detailed and specific succession plan is in place. Please call us at The Law Offices of Steven E. Springer, at 408-779-4700, for a free 20-minute initial consultation with a skilled Morgan Hill business law attorney, in Morgan Hill, San Jose or Fremont.