Business

Succession planning - are you ready?

Wilford Stone, Lynch Dallas
Wilford Stone, Lynch Dallas

The year 2019 has marked changes for many businesses in the greater Cedar Rapids area. Frequent headlines reflect current or anticipated transitions among the leadership of local organizations — from major corporations to public agencies and not-for-profits alike.

The trend has many business owners thinking about succession planning for perhaps the first time. What is going to happen to your business when your leadership comes to an end?

Without a structured plan in place, an unexpected loss of leadership or even a long-anticipated retirement of key personnel could place a small business in jeopardy.

One statistic claims only 34 percent of family businesses are successful in transferring assets from the first to the second generation, and only 14 percent are successful in transferring a business from the second to the third generation.

Beyond the legal and financial complexities involved in transitioning a business to new leadership or ownership, there also are personal and emotional issues at stake.

Corporate changes can be fraught with stress and apprehension.

Whether you’re a new executive or a seasoned business leader, it is time to put succession planning on your to-do list.

Here are some thoughts to assist you in the process:

1. Start now.

Begin at least five years in advance. Get outside help.

Work with your lawyer, CPA, financial planner or other professional and let them get you organized and thinking about the key issues you will face in transferring leadership or ownership of your organization.

2. Be realistic.

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Perhaps you have dreamed of handing your business down to a close friend or family member. But is that person prepared to run the company successfully? Is there a better qualified existing employee?

3. Invest in the transition.

Whomever you choose, spend time training them before passing the reins. Introduce them to your top customers and take the necessary measures to ensure your company’s continued success.

4. Preserve your equity in the business and minimize potential tax liability.

There are many legal methods for strategically transitioning any ownership interests you may hold in your company. Again, consult a professional to learn about the financial, tax and other consequences of your proposed succession plan.

5. Put it in writing.

While it may seem cold, the health of your business should not be dependent on a handshake deal. Put any agreement with new employees or owners in writing.

6. Perform due diligence.

If your transition will include sale of your business, expect the buyer to inspect your corporate records and prepare to investigate your buyer’s ability to pay.

Before exchanging any information, have your lawyer draft a confidentiality agreement for both sides to sign.

7. Taking the business back.

Consider drafting your buy-sell agreement so that you retain power to buy back your business if the buyer cannot make the payments or is otherwise mismanaging the company in violation of the agreement.

8. Non-compete, non-disclosure and non-solicitation agreements.

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Do not be surprised if you are asked to sign a non-compete, non-disclosure or non-solicitation agreement as a departing leader.

Non-compete agreements generally are only enforceable if they are reasonable in time and scope. If you are retiring and do not plan to continue work in your industry, signing a non-compete may pose no burden.

However, if you plan to continue working after your transition, you should seek a lawyer’s advice before entering any restrictive agreement.

Wilford H. Stone is a lawyer with Lynch Dallas in Cedar Rapids.

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