One of the most critical components of business survival, but yet most often overlooked, is the planning for the internal succession of your business. Most business owners, from sole-proprietorships to large corporations, are more concerned with the daily operations, growth and success of the business rather than who will take over when they are gone. While some business owners may have an “idea” in their head of a succession plan, those business owners do not realize that their “ideas” do not benefit the company unless they are written down.
The legal document that is commonly prepared to memorialize the “ideas” is the Buy-Sell Agreement. Simply put, the Buy-Sell Agreement provides for the continuation of a business upon a “triggering event.” A “triggering event” could include death and retirement at a certain age and may include disability, early retirement, involuntary or voluntary termination from employment, or some sort of a force-out situation of a shareholder or partner. The Buy-Sell Agreement, much like the Last Will and Testament, is the controlling document that details the succession of the company in accordance with the owner’s wishes. A properly drafted Buy-Sell Agreement should cover in detail the who, what, when why, and how of the succession. Who the successor or successors of the company will be; what aspects or part of the company will be transferred; when the transfer or succession will occur; why the succession plan is necessary; and how the succession will occur.
Although all Buy-Sell Agreements should cover all these issues, no two Buy-Sell Agreements are the same. Again, similar to the Last Will and Testament, each Buy-Sell Agreement needs to be individually prepared for each company in order to properly address each company’s uniqueness and circumstances. However, unlike a Will, the Buy-Sell Agreement could be triggered while the business owner is still actively employed or working in the company. Depending on the circumstances of the company, if the company’s growth and success are largely dependent on the owner’s or principal’s relationships with the company’s customers or clients, the Buy-Sell Agreement should provide for a transitioning plan whereby a time period (ie. three to five years) is set aside prior to the owner’s retirement or withdrawal from employment in order for the owner to have sufficient time to transition the company’s clients or customers to the successor of the company. Otherwise, without such a “transition plan”, businesses that are dependent on the owner’s continued relationships with the company’s clients will experience difficulty in maintaining success once the owner leaves.
In addition to addressing the transitioning of clients to the successor, where applicable, the Buy-Sell Agreement should also address the transfer of ownership or stock, as the case maybe, to the successor. This would entail the owner considering the various options in determining the purchase price for the transfer, valuation of the company, and the various payment options depending on the “triggering event.”
Obviously, there are many elements to consider in preparing the appropriate Buy-Sell Agreement for your company. A properly structured succession plan takes time, effort, and some creativity, but once properly completed, your succession plan should ensure the continued growth and success of the company that you leave behind.