Legal Commentary

Clear succession plan vital to business owners

By David Canton

For the London Free Press - December 8, 2008

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With an aging baby boomer population, succession planning is quickly becoming one of the biggest issues facing business owners. Lawyers are beginning to see the negative effects of the failure to plan ahead.

Though succession planning has received significant attention in recent years, many businesses have yet to put plans in place. Those who have thought about it may not have thought it through or put a plan in place.

For many business owners and entrepreneurs, the prospect of turning over to a successor the business they have put so much of their lives into building is too emotional to deal with. A properly prepared and executed succession plan can alleviate concerns over the future of their business, help ensure that their business thrives long after they exit and maximize their profit on leaving.

We have already seen situations in which a business owner is thinking of retiring in a few years and selling their business to a chosen individual who may already work there.

The owner discusses the idea with the individual, and strikes a loose, imprecise arrangement by which the individual will assume more responsibilities or service more of the business owner’s long-term customers over time. Sometimes it goes along with altered compensation packages where compensation is based not on a salary but on some kind of commission or fee structure.

But that plan goes awry along the way, leaving both parties frustrated and killing the arrangement. Why? Because the arrangement is loose, either not or poorly documented, and each party has a different view as to how and when the transition is to occur.

The owner may decide he wants to work longer, concerned about a reduced income in the transition years and in retirement, or just can’t seem to give up those customers or part of his control over the business.

The buyer gets frustrated because he or she is not getting the control they anticipated, and the transition is taking far longer than expected.

In the meantime, because of the slow transition, their compensation may actually drop, not rise. Each party is left feeling the other is not living up to their end of the bargain.

At a minimum, the relationship is soured and neither party is happy. And the buyer may just get fed up and walk away from the business and the deal.

So how can this mutual destruction and frustration be avoided?

Having a clear, mutual understanding in both parties’ minds is key to reducing the risk. While the owner may find it difficult, they should have frank discussions with the proposed successor with a view to entering a clear, mutually acceptable, clearly drafted written succession plan or purchase agreement.

And if the parties can’t reach a deal, at least they find out sooner rather than later. That lets both weigh their options before they become limited.

Full post as published by eLegal Canton on December 08, 2008 (boomark / email).