Legal Tips for Succession Planning

Legal Tips for Succession Planning

For business leaders and new business owners, succession planning is an important part of creating and preserving the legacy of your company. Your plan should be enforceable and binding, and it should protect you from any potential lawsuits. A strong succession plan will prevent others from attempting to disenfranchise your intended successors.

There are several complications that can potentially alter the integrity of your business upon transfer including:

  • The unintentional revealing of confidential information
  • Liabilities involving the communication of your departure, or lack thereof
  • Restructuring of the entity’s organization
  • Sudden death that enacts state inheritance laws (which may not match your wishes)

Methods of Transferring Control

There are four common methods of transferring control and operation of your business to a successor. The method that you use to transfer the operational control and profit sharing will be based on your long term strategy and the selection of your successor.

  1. Passing down your business as an inheritance to one of your family members. This requires a properly drafted will and other probate documents and may require life insurance policies. Remember that taxes and liabilities can compromise the transfer and cripple the entity before your successor has a chance to get well acclimated to the change, as well cause strife within the family when emotions become involved.
  2. Allowing a manager or employee to purchase the business from you over a period of time allows you to select one of your most valuable subordinates to take over the business. This can be accomplished by way of employee stock option plans, shareholders’ agreements, purchase and sale agreements and service agreements.
  3. Allowing another business entity or third party to acquire the business in a sale transaction requires extensive and accurate documentation that reflects various aspects of the business’s operation. You must be proactive about maintaining documentation that substantiates and protects all assets and liabilities, intellectual property, real estate ownership and debts, shareholder relations, state and local taxes, and active licenses.
  4. You may also choose to gradually transfer to a family member as a gift, sale or combination of both. This gives you the opportunity to train and mold the person you select, giving you a little more control over operations as you relinquish ownership. The process of transfer can be done so incrementally, allowing a portion of ownership to pass to your successor over time, as milestones are achieved. This type of transfer requires Shareholders’ Agreements, Trusts, Wills and Powers of Attorneys.

Special Considerations

Prior to deciding how you want to handle your company’s succession, there are other legal aspects of the organization that must be considered during the establishment process, and some of these documents require constant adjustment over time. Valuations and Terms of Succession Agreements must be executed early during the formation of the business, and adjusted periodically by a knowledgeable and specialized attorney.

If you have yet to start your succession planning, it can never be too early, but definitely too late if you wait too long. There are multiple steps in the process of establishing the plan, and a multitude of decisions to make.

At Douglas Park Law, we specialize in the tech industry and have extensive experience working with technology leaders and start-ups. Take the first step in your succession planning. Call us today and schedule a consultation where we can help you develop a plan that will ensure a seamless transition when the time comes to pass your business along.

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