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Succession Planning for Business: What You Need to Know Now About the Call You Never Want to Make

05/26/2015 12:58 pm ET | Updated May 15, 2016

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Psychics aren't the only people asked to predict the future. When it comes to succession planning, lawyers ask their business clients to do it all the time.

My discussions about succession planning often start out somewhat reminiscent of Alice's chat with the Cheshire Cat in Lewis Carroll's Alice in Wonderland.

It started out like this:

Alice: "Would you tell me, please, which way I ought to go from here?"

Cheshire Cat: "That depends a good deal on where you want to get to."

The Cheshire Cat went on to explain that if you have no idea where you want to go, then any path will do. If, however, anywhere isn't good enough, then planning is required. And when it comes to succession planning, we're talking about significant thought often devoted years in advance.

So, what is succession planning? Fundamentally, it's deciding early on in the life of your company what happens to the ownership interests - the equity -- if something happens to you and/or your co-owners. (I'll sacrifice legal accuracy for ease of reference and refer to all co-owners as "partners," even though some may be members, as in an LLC, some may be the stockholders of a corporation, and some may be true partners involved in a partnership.)

I should pause here to impart one essential truth I've learned from almost thirty years as a business lawyer: Your partnership will end. It may last 50 years and only end in the death of a partner, but it will end. Your decision, right now, is whether or not to prepare for that ending.

There are 5 and only 5 ways to leave a company:

  1. Death
  2. Disability
  3. Voluntary Departure
  4. Involuntary Departure
  5. Retirement
Every departure, no matter what the circumstances, fits into one of those five categories.

Death and disability are the ones most difficult for us to contemplate. They are, however, the easiest to prepare for, at least in a legal sense. Key man insurance and planning can go a long way here. But there are other reasons, perhaps now unthinkable, that may lead a partner to leave.

One of your partners could decide to stop working. Perhaps out of a desire to retire, or perhaps because of other reasons. The illness of a spouse, the desire to move closer to grandchildren, an addiction to alcohol or drugs, depression, or simply a desire to heed the "life's too short" rule while one is still young enough to reap the benefits of having done so -- all leap to mind.

  • What would happen to your partner's share of the business?
  • What would happen to the business itself?
  • What would happen to you and to your employees?

Recently, I received a call that no one wants to make. Two clients co-owned a very successful construction business. While only in their 40's, they had expanded farther and achieved more than they had ever thought possible when starting out together fifteen years earlier. Now, one of them, the marathon runner as it turned out, had died of a heart attack. The other was on the phone.

They had thought themselves too young, or perhaps just found themselves too busy to consider a Buy-Sell Agreement. Now, the surviving partner was not only dealing with his emotions, but also with the seemingly insurmountable tasks of replacing his partner, keeping the business humming, satisfying the customers, reassuring his employees, and attending to the needs of his partner's spouse and young family.

In an exercise akin to building wings while you are flying, we worked it out, but it took 6 months of stress and uncertainty. The steps which we followed are those which should be addressed by any organization with co-owners.

First, we placed a value on the partner's ownership share. We used a valuation expert, experienced in working with companies in my client's industry, to provide us with an appraisal.

Second, we worked out a purchase agreement with the partner's spouse and estate to make sure that his family received fair value and that the company could move forward.

Third, we entered into a defined, legally binding payment plan with the partner's spouse and estate so that my client could buy the stock without suffocating the company's cash flow. To do this, we worked closely with the company's accountant and its banker.

I won't call this a "happy ending," because my client's partner and friend died far too soon. I can, however, say that the ending could have been far worse from a legal standpoint. The spouse didn't have to agree to sell the stock. Alternatively, the spouse could have held out for a much higher value than the company was able or willing to pay. A Buy-Sell Agreement would have headed off those possibilities.

Like a ship, a company represents far too large an investment of time and money to be cast adrift. In the final analysis, taking some time away from the daily grind of putting out fires and handling the latest emergency in order to consider your course is the first job of a true captain.
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