An entrepreneur or a group of partners that launches a business should have a succession plan in place as they begin operations, or not long after the company begins servicing the public.
“It’s probably good to do so as soon as you go into business because 30-year-olds have accidents and life-changing events just as people who are 50 or 60, so some of those things we can’t plan for,” says Frank Mayer, an attorney with the Syracuse–based law firm Bond, Schoeneck & King PLLC. Mayer spoke with CNYBJ on April 14 from his office in Albany.
Life has “certain eventualities” that people will have to face, either voluntarily or involuntarily, says Mayer. They include death, disability, termination of employment, a change in a family situation, or a health crisis.
The circumstances could also include a change in business partners or those related to business partners that make it “important and necessary” to have a good transition plan in place before you really need to have one.
“We need to have a transition plan in place because when those events occur, we don’t have time to sit around to come up with what we’re going to do,” says Mayer.
A succession or a transition agreement ensures that a business owner’s loved ones and any remaining or surviving business partners are protected, he added.
If something happens
The succession plan should also include language to determine what happens if something should happen to one or more of the partners in a business.
The parties should agree to revalue the firm’s interests every year or two, based on a formula or some other method. They should agree to keep proper insurance in place before those involved “become uninsurable or difficult to insure.”
“If you wait until the event happens, it’s too late,” says Mayer.
If a business owner gets sick or dies with no agreement in place, the transition process will depend on if the person has a partner or another shareholder.
With no agreement in place, the deceased individual’s family members become “successors in interest” and the surviving owner or partner may end up operating the company with someone who they don’t know and with whom they might have different opinions on how to handle operations.
The surviving partner could then attempt to buy out the deceased individual’s family, according to Mayer.
If the business is family owned and operated, the partners may have to revisit the succession agreement more than once, if the children in the family are minors when the business starts.
“You want to make sure that the agreement remains in step with the reality and the value of the business and the players,” says Mayer.
At some point the parties involved — including the business owners, members, and shareholders — should agree on a buyout formula to preserve value in the company.
The owners should have an interest in securing the proper types of insurance and get the funding in place so it’s a buy-sell agreement with a buyout mechanism that everyone can agree on and have the appropriate funding available.
“The devil is always in the details,” Mayer told CNYBJ. A business-succession plan is “something that people should think about sooner rather than later,” he added.