Succession planning is a crucial aspect of any business owner’s life. As entrepreneurs forge ahead, planning for a seamless transition of their enterprise to the next generation or a chosen successor is vital to ensuring the business’s longevity. Business succession planning is not merely a contingency plan but a strategic imperative that requires thoughtful consideration, meticulous preparation, and a comprehensive understanding of the legal and financial implications.
Why Is Succession Planning Important?
Business succession planning involves transferring ownership and management of a business to a new owner, such as an immediate family member or another chosen entity. When planning to leave behind such a legacy, business owners should take adequate time and care in preparing their succession plans. By doing so, they can maximize the ongoing value of the business, minimize disruptions, and be confident, knowing they provided their successors with the resources and knowledge required to help the company continue to grow and succeed.
Some critical considerations for business succession planning are set out below.
A Clear Exit Strategy
When any entrepreneur begins to consider their future within their business, it is essential for them to identify the needs and goals of both themselves and the business well in advance of any transition in leadership. While the planning process may be abstract and non-linear, it is vital to formally identify key elements of the transition as early as possible. While there are numerous considerations to think about, it is important to be forward-thinking in any approach and consider any trends and factors that may impact the daily operations and financial stability of the business to minimize as many unknowns as possible. Addressing potential issues before they arise, such as tax planning, economic trends and the impact of a change in leadership on employees and clients, aids with a seamless transition.
Identify Likely Successors
A business owner should take extensive care and consideration when considering who will take over their business and lead in their footsteps. Sometimes, the business might pass on to the owner’s children or other family members. However, in other circumstances, owners may wish for a key existing management-level employee to take the reins. Alternatively, an owner may want to value and sell their business to an unrelated third party.
Whatever the case, clearly identifying successors is an essential component in succession planning, as it can dictate what direction the succession strategy will go. For example, a child taking over the business may already have the necessary knowledge and training to step in at any time, while an existing management-level employee may require additional training and preparation to step into such a role.
Proactive Financial Planning
In the business world, financial planning is a crucial and ongoing consideration for any business owner. When it comes to succession planning, an entrepreneur must first consider what they must do to ensure the business remains financially stable. Next, they should identify what financial involvement they will have, if any, after stepping away. If an existing owner wishes to remain invested in the business, it is crucial to determine what this arrangement will look like.
Address Estate Planning Concerns
Once a business owner has completed a retirement analysis and has identified likely successors to take over, it is vital to prepare (or update) an estate plan. This is particularly important if the ownership of the business remains within the family, as fair consideration has been given to those individuals through the estate plan, and if the business valuation represents a substantial portion of the estate. Owners may also want to consider an “estate freeze” to help transition the business to a family member. Additional tax and trust options may also be explored to ensure the estate plan adequately considers all involved.
Prepare a “Plan B”
Although preparing a comprehensive business succession plan with the help of an experienced business lawyer is critical, entrepreneurs need to have a “Plan B”. Life can change quickly, and having some type of contingency set in place can make all the difference. This is particularly the case if an accident occurs, rendering an owner unable to make such decisions at a later date, such as a permanent disability or sudden death. By having a backup plan, owners can ensure that new management of the business will be implemented immediately to mitigate any impact on customers, clients, and employees.
Consequences of Poor Planning
Failing to prepare an adequate business succession plan can result in several issues, as set out below.
Operations Disruptions
Without a clear transition plan, a business can be subjected to several interruptions in operations to workflow, employee training, and project timelines. Furthermore, if accounts payable and accounts receivables are not properly maintained throughout the transition, the business may experience deficits and missed payments. All of these disruptions can ultimately impact customer experience and service quality.
Employee Challenges
Without a clear succession plan, business owners may face challenges in retaining employees and maintaining morale. Employees may look for alternative opportunities if they perceive a lack of stability or advancement opportunities within the business. As such, companies risk losing not only key talent but also their institutional knowledge and corporate memory of day-to-day operations. Further, employees may have reduced motivation and accountability when a structural change is poorly planned.
Shareholder and Customer Concerns
Shareholders, clients, and customers may express concerns or lose confidence in the business if they perceive instability during a leadership transition or corporate restructuring. Such a loss of trust and confidence can be difficult to rebuild, ultimately impacting the business’s reputation and bottom line. Uncertainty surrounding the departure of a critical figurehead may also cause stakeholders to revoke their support for the company.
Family Disputes
Poor succession planning can result in family disputes if a business is family-owned or involves several family members. Without a clear plan, disagreements may arise relating to asset distribution, leadership roles, and overall management decisions.
How a Corporate Lawyer Can Help You Prepare Your Succession Plan
If you are starting to think about business succession planning but do not know where to start, an experienced corporate lawyer can help ensure you cover all of your bases and have a sound succession plan in place for when you choose to step away from your enterprise. Not only can a knowledgeable business lawyer help you identify your retirement goals and develop a practical exit strategy, but they can also help you work through the more intricate parts of succession planning. These considerations include transitioning the business to a successor, obtaining a business valuation, and mitigating conflicts that may arise throughout the process.
Once a business succession plan has been prepared, it is essential for any business owner to continue to document any relevant information successors or professionals may need and communicate the future transition plans to everyone involved as early as possible to allow adequate time for preparation.
Contact the Corporate Lawyers at Baker & Company for Trusted Guidance on Business Succession Planning in Toronto
At Baker & Company, our Toronto business succession planning lawyers can help you establish a business succession plan tailored to your needs. We have extensive experience and expertise in providing clients with advice on corporate law and estate law. We can guide you in implementing the plan that works best for you and ensures your business’s future success. Call us at 416-777-0100 or contact us online to schedule an initial consultation with a member of our business law team.
