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NC and SC Estate Planning and Elder Law Firm

Wednesday, November 23, 2016

You Don’t Really Have A Succession Plan If You Haven’t Put Your Plan Into Action

Several years ago, an estate planning attorney I had met at a conference called looking for some advice. One of his clients had recently passed away very unexpectedly, and he was scrambling to help his client’s widow take control of her late husband’s business. Things weren’t going well.

The widow was, understandably, overcome with grief, but she was doing the best she could. Unfortunately, she didn’t even know which keys opened the front door, let alone how to run the business on a day to day basis.

The couple’s son was considering dropping out of college in order to come home and take over the business like his dad always wanted, but he was not excited about it. The wife was adamantly against her son dropping out of college.   

In the meantime, three of the employees had taken all of their files home with them and set up their own competing business. The wife was livid, but since she knew she couldn’t run the business, and she didn’t want her son to drop out of college, she was interested in approaching the employees who left to see if they were interested in buying the business.

The attorney wanted advice on how to structure the sale, but it soon became clear that there was nothing left to sell. The majority of the value of the business was in the deceased owner’s knowledge and in existing contracts. With those assets gone, the business was not worth much.

Without a concrete succession plan in place, a successful business can be destroyed, leaving everyone who depended on it with nothing.

The business owner in the story above (and in all honesty, his estate planning attorney) actually thought he had a succession plan in place. There is a big difference, however, between having a plan for a plan (assuming the son would take over) and putting a succession plan into action.

In order for a story like the one above to have a happy ending, the business owner must have done a lot of prep work to prepare to hand off their business. In fact, they will need to have developed and implemented two different succession plans - one for emergencies, and one for if everything goes as the business owner desires.

The emergency plan.

An emergency plan is something every business owner needs to have in place regardless of whether they have begun to think about exiting the business.

The owner needs to know who is going to step up if they themselves or a key employee is unable to work, or in the case of the employee, quits. The person who is expected to step up needs to be informed of the owner’s expectations and also trained.

The business as usual plan.

Long-range succession plans often wind up looking a lot like the emergency plan but with some extras. At its core, the plan needs to identify a successor, ask them if they are interested in taking over the business, and then work with them to make that happen.

Because there is time to do so, these plans can incorporate estate planning needs and tax savings.

Don’t assume a plan will work if you aren’t working on it.

The key to making both types of plans work is working on implementing them. Business owners should never assume that the succession plan they have in their head or in their estate planning documents will work out if they aren’t actively working on it.

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