Whether you are retiring, selling, or thinking about leaving your business, a business succession plan is a necessity for your business as it enables for your business’ smooth transition over to its successor.
What is a business succession plan?
A business succession plan is a plan that outlines the details of the handover of your business from yourself to your successor. A well drafted succession plan is the key to prevent disputes arising out of your exit from the business. It also ensures that the transfer of your business to a new person is a successful one as many businesses without a succession plan tend to fail when a successor takes over.
While it is not a legal requirement for a business to have a succession plan, it is highly recommended that businesses have a succession plan as unforeseeable events may mean that you will have to transfer your business to someone else.
What is involved in creating a business succession plan?
Depending on how big your business is, the industry your business is within, how involved you were in your business, and who will be taking over your business are all factors which you need to take into consideration when drafting your succession plan for your business. Above all, the most important thing to keep in mind is that your plan needs to be realistic and achievable.
With this in mind, there are a few steps involved when creating a succession plan as outlined below. As with all legal documents, we always recommend seeking the advice from a qualified lawyer who will be able to assess and ensure that all things necessary are included in the document, and no important things have been left out.
Step 1: Select your successor
Your successor is essentially the person you nominate to handover your business to when the time comes. First and foremost, it is vital to select someone who has the time, dedication, and experience to spend on your business. Your successor may be a current or previous business partner, a long-term employee of the business, a family member, or even an outside buyer.
For those of your who are considering leaving your business to a family member, it is vital for your succession plan to consider matters of inheritance, ownership, and management disputes of your business. It may be necessary to seek the advice from a family lawyer where family relations have broken down.
Step 2: Consistently obtain valuations of your business
The value of your business is a fundamental factor in how your succession plan is drafted and it also key item for consideration in relation to many of the provisions contained within the succession plan. As the value of a business can fluctuate over time and your exit from the business is not determined, seeking regular valuations of your business is vital as this may mean that you will need to update your succession plan.
There are various types of methods in which you may obtain a valuation of your business. Expert advice from a professional is the best way to determine which type of valuation you should seek.
Step 3: Draft your succession plan
Once you have determined who to appoint as your successor, the drafting of your succession plan may commence. It is important to seek the advice of an accountant for any financial risks that may arise in your succession plan. In terms of drafting the succession plan, our lawyers at GLG Legal have experience in drafting succession plans to a high standard where there is little room for interpretation later down the track.
Your lawyer will be able to provide you with unique advice to your business and situation however, things that you may want to consider when drafting your succession plan include the following:
- Who is your successor?
- When do you plan to leave the business (i.e., is there a set date or is it still up in the air?)?
- What will be the responsibilities of your successor?
- Will you be gifting the business to your successor or will there be a financial settlement of the business to your successor based on the valuation?
- Will your successor receive any training for the handover?
- Are there any legal requirements that need to be attended to?
- Will your business retain the same business structure?
Step 4: Regularly update your succession plan
Whether your business experiences short bursts of change or if it experiences consecutive changes, it is important to keep your succession plan updated. It is particularly important to review your succession plan if there is a falling out or dispute between you and your successor.
To stay on top of this, it may be useful to diarise periodic dates to check your succession plan and ensure that its contents reflects your business and its interests at that moment in time.
A well drafted succession plan will make the process of handing over your business to your successor as easy as grabbing a coffee. Having a clear and articulated plan means less distractions and little room for disputes when the handover is happening. It takes away a lot of the stress and uncertainty that usually accompanies business owners when they are leaving their business.
Our team here at GLG Legal understand the important of leaving your business in capable hands. We have assisted several businesses in drafting their succession plans to ensure that they are fit for the business owner’s personal and business interests. If you are a business owner in need of a succession plan, or if you would like further information, contact our office today!