There are few challenges as rewarding as running a successful business. Business owners pour years of hard work into pursuing passions that are about more than just making money. So it makes sense that many business owners prefer to have a say in what happens to their business after they leave it. That is why it is important for all Houston business owners to have a plan for succession in place in case something happens that prevents them from being able to run their business.
Like prudent estate planning, creating a business succession plan requires some thought. The options are numerous, and what is right for one person or business will not necessarily be right for another. Here are some things to consider when it comes to crafting a business succession plan:
Type of Business Entity
The type of business entity is a crucial factor in creating a successful succession plan. The same solutions that work for a one-member LLC will not be a good fit for the majority owner of a large publicly-traded company. For a small business, with one owner, selling the business and its assets may be the best option. There may not be another individual with the knowledge or desire to take over and run the business once the original owner is unable to. If there is a willing and able successor, the business owner should make sure the necessary documents are in place to provide for a smooth transition in ownership.
Part owners of larger businesses with multiple partners should first look to the businesses’ governing documents to determine an appropriate succession plan. For example, an LLC operating agreement may outline what has to happen with a member’s share in the event that they retire from the business or pass away. In such a situation, there is not much planning to do. However, if there are fewer or no restrictions on each owner’s share of the company, comprehensive instructions will need to be created to ensure the owner’s desires are properly met.
Determining how a business or a part owner’s share in the business will be valued is critical to successful business planning. Because it implicates competing interests, the valuation of a business has the potential to lead to disputes if the process is not agreed upon beforehand. Business partners can get creative when it comes to agreeing upon a valuation method. They could have an agreed-upon third party such as a CPA make the determination, or they could hire a specialized firm. They could also set the value of the business at the outset. While this does not leave much flexibility, it does provide clear expectations. In the end, the particular method is not important as long as the important stakeholders are included in the agreement.
The Value of Life Insurance
Closely held businesses with multiple owners would be wise to recognize the usefulness of life insurance when it comes to succession planning. Life insurance policies can be used to provide a safety net should a business partner pass away unexpectedly. This can be done in a few different ways, but the basic idea is that each business partner has a life insurance policy in their name. Should they pass away, the other partners can use the proceeds to purchase the deceased owner’s share. That way the remaining partners can continue to run the business without having to worry about taking on another new partner.
Take the Time to Create a Succession Plan for Your Houston Business
Regardless of what sort of business you have, the importance of a Houston business succession plan is clear. At McCulloch & Miller, PLLC, our attorneys have the experience and knowledge to help you craft a business succession plan that meets the unique needs of your business. Effective planning is the best way to ensure that your wishes are met. Give us a call at 713-333-8900 to schedule a free consultation, and start your succession plan today.