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Every business should have a succession plan, and preferably, from the time the entity is formed.  A plan ensures the business will remain profitable during a transfer of ownership due to death, disability, retirement or another “Event” that affects one or more Exiting Owners.    

During an “Event”,  ownership  can pass (a) to a member of the Exiting Owner’s family, (b) the other owner(s), or one or more employees.  The Shareholders’ Agreement (for a corporation), an Operating Agreement (for an LLC),  or a Partnership Agreement (for a partnership) should clearly state the plan.

Every succession plan is unique, but some considerations are universal.

Will the buy/sell arrangement be structured as a “cross-purchase” or a “redemption “?

Cross-purchase arrangements allow the remaining owners the first option to purchase the Exiting Owner’s  interest.  A redemption grants the option to the business.

In a family business, must the deceased Exiting Owner’s ownership interest be sold or can the beneficiaries retain and receive ownership interest as part of the distribution of the estate?

Either way, the heirs may want immediate payment for their inheritance. A purchaser may want to pay over time.  The plan can stipulate the procedure.

Will the lives of the owners be insured in order to fund or partially-fund the transfer of ownership? 

Taking out “key man” life insurance can defray necessary out-of-pocket costs in the face of an Event.

Can an owner sell/transfer his/her shares to an outside third party?

The plan may give the first option to purchase the Existing Owner’s interest to the remaining owners or the business before allowing sale or transfer to an outside party.

If an owner disassociates from the business, either voluntarily or involuntarily, will that owner be able to “compete” with the business?

“Competition”, the duration of any restriction, and the restricted geographic area must all be defined. Any trade secrets must be protected with a non-disclosure provision.

Our detailed, succession planning questionnaire addresses these and many other issues.  Having a succession plan in place today can ensure a smooth transition of ownership in any unexpected situation, and potentially save thousands dollars in legal fees and court battles.

Keith A. Zerman is a licensed attorney at Gardi, Haught, Fischer & Bhosale LTD Ltd. in Schaumburg who specializes in estate planning. Contact him at 847-944-9400.

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