Business Succession Planning: What Is It and How Do we Talk about It?

Business Succession Planning: What Is It and How Do we Talk about It?

For the past several weeks I’ve been talking about partnership agreements and how to legally structure a partnership. But, this post is a little bit different. It’s a little more personal and frankly a tad morbid, I suppose. 

I’ve been working with a client, two partners that own multiple businesses together. The sad fact is that one of the partners is likely to pass away this year. It is doubly sad because he is relatively young and now we are faced with the sadness of losing a long-term client and also how to manage the transitions in the business. 

I cannot stress enough the importance of partners to discuss business succession planning. This isn’t simply what is going to happen if a partner retires, but also what is going to happen if something bad happens to a partner — whether it’s quick and tragic, such as a car accident, or long-term and tragic, such as a cancer diagnosis or a life threatening condition. I encourage business partners to have discussions about how to handle the rights and duties of a partner if they suddenly are not available to contribute on the day-to-day, or tragically are rendered incompetent due to their condition. 

There are multiple questions that are involved: how do we transition voting rights? What do we do with stock? How do we manage inheritance, wills, and trusts? All of these questions are part in parcel of both an operating agreement, and the central question of how do we as a business look toward the future and manage potential challenges.

Let’s face it — there is always the potential that one partner will pass away before the “end” of the partnership whether that be retirement or the sale of the business. I strongly encourage partners to take a step back, find a time away from the day-to-day management of the business, huddle up and work through how partners want to address topics such as family, voting rights, financial rights, etc. Are we going to name each other in the will? Will we make a trust or estate plan? All of these things should be part of a discussion between partners. It should not be winging it if something devastating occurs. By the way, this is a good time to bring together your “management team” for this kind of discussion. 

There are other things you’ll have to take care of as individuals within the partnership. For example, our firm usually represents business entities and not the individual partners. Certainly we advise the partners, but if there is a disagreement between the partners, we as counsel to the business are often put in the position of having to mediate a dispute or step back until the parties can figure out what they want to do (with or without their personal lawyers). When it comes to business succession planning, that is even more important because often business succession involves the individual partners’ wills, families, and often minor children. 

Business succession planning is one of the most important conversations that business partners can have. I cannot stress strongly enough that it is an ongoing conversation. Maybe not every week, month, or year, but certainly on a regular basis the partners should be having conversations about business succession.