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Creating a Business Succession Plan 

Engel Professional Association Dec. 29, 2022

Estate planning is the process of putting the right legal instruments and people in place to take care of your loved ones should something happen to you, whether it be incapacitation or death. If you own a business, wholly or partially, that certainly must be a prime consideration in estate planning.

Owning a business is also, most likely, the path to retirement for you, so along with an estate plan, you need to create a business succession plan not only for when you decide it’s time to retire but also for unexpected life changes and, of course, for life’s finality. 

Alarmingly, according to the Minnesota Center for Employee Ownership (MNCEO), 85 percent of all businesses do not have a business succession plan in place, and half of all owners are 55 or older and nearing retirement age.  

If you’re involved in business ownership in or around Minneapolis or St. Paul, Minnesota, contact the estate planning attorney at Engel Professional Association. We have helped countless others like you not only create estate plans to care for their loved ones when they’re gone, but also to have a plan in place if a business is involved. We proudly serve clients across Minnesota, including in Mankato, Maple Grove, St. Cloud, and Woodbury. 

What Is a Business Succession Plan? 

A business succession plan is a blueprint for having the proper people and processes in place to continue operations once you’ve decided it’s time to move on from your business. This may involve just letting others – called key personnel – continue operating the business while you move into more of a hands-off approach. It may also mean selling the business and cashing out. It really depends on your unique circumstances.  

A lot also depends on your family situation. One of your children may wish to move into your role and operate the business pretty much in the same way as when you were there, or even move things forward. This, of course, assumes that this person has the qualities needed and that you would train your family member well in advance of any transfer. 

The same can be said if you’re planning to leave business operations to key personnel, perhaps just to one vital employee. You need to train that person well in advance. Then, the question arises over whether this person will want to just buy you out. Your plan has to consider that option as well. 

The Importance of a Business Succession Plan 

As with estate planning in general, you don’t want your loved ones to try to suddenly piece together a strategy for dealing with your ownership responsibilities should you become incapacitated or pass away. A business succession plan aims to prevent that dilemma. It also allows you to consider your options regarding your business interests when and if you do decide to retire. 

What Are the Steps in Creating a Business Succession Plan? 

The first step is to confer with an experienced and knowledgeable business succession/estate planning attorney. The type of business ownership you’re involved in will then dictate how the plan should unfold. In your succession plan, you will need to cover how your role in the company will be assumed and by whom as well as how you will receive compensation for your investment. 

Generally speaking, there are five common means for transferring a business: 

  • Co-owner: You can sell your interest in the business to the other co-owners. It’s vital to have an agreement in place on how to value each co-owner’s share to avoid in-fighting when the time comes. 

  • Heirs: You can pass ownership directly to a family member if it’s a sole proprietorship. However, that family member must be prepared for the transfer in advance and also be willing to do so. Sibling rivalries might also result. 

  • Key Employee: You can transfer or sell to a key employee, which generally means your business would be a sole proprietorship. 

  • Outside Party: You can obtain a valuation of your business and then sell to an outside party. 

  • Partnership: Generally, the partnership agreement will specify how to handle the departure of a partner who decides enough is enough and wants to move on. The agreement may allow a transfer of your ownership portion to a family member or an outside party, or there may be a buyout provision for the other partners. Life insurance policies purchased by the partners can be used in the event of a sudden death and the need to compensate the late partner’s estate. 

Common Obstacles to Consider 

Your family members may not want any part of your business. They may have already moved on to solid careers of their own. Your spouse may have no inclination to keep operating your sole proprietorship and will just want to cash out and use the funds for their own retirement. 

A key employee may not want the role unless you sell the business to him or her, but that person may not have the cash to buy you out. You may have to arrange a periodic payment plan. Of course, partners too may want no part of your family taking over your share or of your selling out your share.  

The bottom line is, the more you can develop a comprehensive business succession plan, the better the prospects are for a smooth transition. Planning well in advance gives you time to take into account these and other obstacles that likely will appear. 

Turn to Accomplished Legal Support 

Even if you’ve discussed your succession ideas with family, co-owners, or partners, things may not always unfold as you wish in the long run. People change their minds, or when faced with reality, may suddenly not like what they agreed to. 

You need a more solid, legally-grounded plan. If you’re in the Minneapolis and St. Paul areas of Minnesota, or in nearby communities, contact Engel Professional Association when you need to fashion a solid business succession plan. You can also rely on us for all your other estate planning needs. Reach out today.