Succession planning can be one of the most important parts of estate planning in Alabama. Unfortunately, Limited Liability Companies and Corporations are often overlooked when it comes to drafting a will or planning for the next generation. This creates unnecessary risks for the continued operation of the business and the inheritance of any heirs that may be involved in the day-to-day operation of a multi-generational family business. When a founder or key leader passes away or becomes disabled, the business can be ruined. With a succession plan in place, leadership remains intact and harm to the business can be avoided. Most importantly, you can insulate your business and legacy against post death probate disputes.
At Alabama Property & Estate Law, LLC, our trust and estate planning lawyers based in Madison County handle business succession plans for business owners while coordinating their overall estate plans. We aim to keep your business running smooth regardless of succession.
If you would like to discuss Business Succession Planning with an attorney you may call our office at 256-489-0038 or
Send us a Consultation Request
What Is Business Succession Planning?
Business succession planning involves developing a strategy for what happens when an owner leaves the business, retires, or passes away. It involves the creation of critical legal documents that will facilitate and ensure a smooth transfer of ownership. Business succession plans are most critical for small and family-owned businesses and should always be included in the owner's estate plan. Often a will is not enough and additional planning must be done within the corporation or limited liability company.
Effective business succession planning ensures an organization continues to function following the exit or death of an owner, minimizing the associated costs and disruptions to the business while ensuring its longevity. In sum, business succession plans – if drafted with the right language – minimize risks.
Common Risks Businesses Face without a Succession Plan in Alabama
Knowing the risks can help you avoid them. For small or family-owned business the more common risks include:
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Ownership Fights. If your estate plan is not carefully coordinated your heirs may find themselves as co-owners of a business with no idea how to operate. A clear strategy that directs that transfers ownership of the business upon retirement or death is absolutely essential.
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Diminished value of the business. A business's success is often based on the relationships that are nurtured over the years. When a trusted owner dies or exits the business, clients and customers want assurances that the business will maintain the same level of quality services, or else they will leave, too.
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Loss of trust. If you do not have a business succession plan in place, transitioning from one owner to another will take more time. But time is money, and the longer it takes to recover from the loss of the owner, the more likely clients, customers, employees, and investors will lose their faith in the business and go elsewhere.
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Loss of experienced and skilled employees. If leadership fails due to a lack of a succession plan, you put your greatest resource at risk: specialized employees. Skilled and experienced employees are in high demand and so they may look for professional opportunities elsewhere.
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Vulnerable to competitors. If a succession plan is not in place and a hungry competitor becomes aware of the situation, they could plan to take over your business to increase their market share.
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Potential for conflict. When a business owner dies or exits a business without a succession plan in place, the core values and mission of the business may be questioned. Without the right leadership and quick decision-making necessary to keep the business intact, conflicts may arise among personnel, employees, and others.
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Unqualified new leadership. In the absence of a succession plan, mistakes may be made in the rush to fill the gap. If the new person hired to fill the loss is not capable and qualified, it can facilitate all of the above risks.
Again, these risks are just a few examples of what a strong, solid business succession plan can help you avoid.
Types of Business Succession Plans
There are two main types of succession plans: long-term and emergency.
Long-term Succession Plans
Long-term planning involves proactively looking ahead and preparing for an eventual transfer of ownership, such as when an owner retires. It often requires identifying and developing talent over an extended period to prepare individuals to step into key leadership roles.
A long-term business succession plan should be reviewed and updated regularly based on the company's changing needs.
Emergency Succession Plans
An emergency succession plan manages a sudden change of ownership. For example, an owner may die unexpectedly, and this event can send the business into a downward spiral.
An emergency succession plan considers the legal transfer of ownership and interim measures to follow while longer-term plans are developed, such as the appointment of an acting successor.
Documents You May Need for a Business Succession Plan
Business succession planning can be complex, involving the preparation of a range of documents.
It may require existing governing documents – like a partnership or operating agreement or articles of incorporation – to be updated. It may also involve drafting new documents including:
- Wills, Trusts, or Transfer on Death designations
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Appraisals or business valuations
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Entity purchase agreements, involving insurance policies to fund buyouts
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Buy/sell agreements, enabling the surviving partners to buy the deceased's partners shares from his or her family
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Employee stock ownership plans, allowing employees to purchase the departing owner's interest via shares
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Management buyout plan, allowing the management team to buy the company
The circumstances of a business and its specific succession plan will determine the documents needed to execute it. A business succession lawyer can advise you on the relevant paperwork in your situation and draft any technical documents for you.
Key Elements of a Business Succession Plan
Business succession plans will and should be unique to your business and your needs. That said, there are some common, key elements that should be included in any and all business succession plans.
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Strategic Plan. A strategic business plan explores the current state of the business and its future, including potential risks that should be considered and proactively addressed.
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Financial Plan. This plan should determine financial goals and resources as well as financial assets, cash flows, taxes, and projected growth, among others specific to your business.
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Ownership or Leadership Transition. Multi-year strategies are needed to address who will own the business in the future and how the transition of ownership will be handled or proceed.
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Successor Identification. Three potential outcomes for a transition exist: (1) family member(s); (2) employee(s); or (3) a third party. A strategy must be put into place for the option you choose. Things like skills, impact on the business, resources, and more must be considered.
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Governance. If your business is a family-owned one, you want to address what governance will look like: does it involve an advisory board or board of directors or is it more like a family council?
Get a Smart Business Succession Plan: Contact an Estate Planning Attorney in Madison County Today
Risk reduction is what a smart business succession plan is all about. At Alabama Property & Estate Law, LLC, our business succession planning attorney in Madison County will take the time to build a solid succession plan intended to significantly reduce risk. Contact us today by filling out a Consultation Request or calling us at 256-489-0038 to schedule a planning meeting.