Nichole Y. Shafer
Guest Columnist
We live in a world where many are chasing the American dream. For many, that includes making a living doing what you love and could mean owning your own small business. However, as the owners of small businesses anticipate retirement or pass away, the ownership of the business must obviously transfer to someone else to avoid closing.
The change in business ownership can be a complete transfer, which is common when a business owner suddenly dies or if a business is sold to people other than those involved in the business.
If a business buyer is an employee or family member of the business seller, the business ownership process could be a gradual transfer. A gradual transfer allows the business seller’s relationships and knowledge of the business to be conveyed upon the business buyer.
The process of a gradual transfer in ownership is called a “business succession plan.” The best business succession plans are individualized for each business and often facilitated by outside professionals (such as attorneys).
In the context of business succession planning, my office refers to the existing owners as the “senior generation” and the prospective owners as the “junior generation.” However, these terms do not always correlate with the age of the seller and buyer.
Business succession plans are not always formal and are not always in writing. However, regardless of the size of a business, use of a written business succession plan, even if brief, can minimize uncertainty and confusion.
A good business succession plan will ensure the business’s viability (financial ability to cashflow) while aligning all stakeholders’ incentives. This includes the ability to be fair to all stakeholders while capturing the senior generation’s knowledge and experience and the junior generation’s energy and ideas.
Successful business plans are designed to align the goals of the business seller and the business buyer. Typically, the business seller is contractually unable to compete with the business after the ownership change. However, the business seller almost always has relationships with customers, suppliers and competitors that the business seller can influence. Thus, a successful business plan helps to work these relationships to continue the success of the business.
Aligning incentives and having an arrangement that requires the business seller to keep some “skin” in the business’s game for some period during the gradual transfer usually allows for a successful succession plan.
Successful business succession plans should always include a written outline of the timeline of the transition. Of course, this document can be modified over time and can have flexibility included in the plan without hurting the succession plan.
Other key items to include in succession plans are during what times who is the ultimate decision-maker, the allocation of profits and losses during each part of the transition and the timing and amount of purchase payments. (This is especially important for the taxes of the business seller.)
A well-written business plan can be facilitated by your attorney and can be one that aligns the incentives of both the business seller and business buyer making the business transfer smooth and one that minimally impacts the customers.
Nichole Y. Shafer is an Ohio-licensed attorney at Schroeder Law LTD in Putnam County. She limits her practice to business, real estate, estate planning and agriculture issues in northwest Ohio. She can be reached at [email protected] or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.
