Business Succession Planning: Power of Attorney

Business Succession Planning: Power of Attorney

In previous blog posts we talked about some aspects of business succession planning, most recently how to proceed when a single owner of a company has a disability. In this post, we will focus on how a business owner can prepare for future risks by preparing a power of attorney ahead of time. First, we will review the differences between short-term and long-term disability, and then we will jump into important considerations one must make in choosing who will be their power of attorney.

Short-Term Disability

If the owner is in a place to communicate and make major decisions without any issue during their short term disability, that is the best scenario. For example, maybe you had a surgery with one month of recovery. In that scenario, if the business owner is able to make decisions and employees are able to maintain day-to-day operations and customer acquisition, then you probably won’t need much more.

Long-Term Disability

However, if there is going to be a long-term disability in which the owner is not able to manage any business affairs, the most common mechanism to use is a power of attorney.

Most states have a statutory power of attorney. This is a broad legal document that authorizes an individual to make decisions on your behalf. You can get this document easily by copy and pasting the law of your state. If you’re in Maryland, you can use this document to prepare yours. Attorneys also have the ability to draft a power of attorney agreement. A business power of attorney has many of the same features of a standard power of attorney, but it is focused solely on the business.

Important Considerations

An important consideration that a business owner must address is who is going to receive the power of attorney. That is going to require a lot of thought and detailed discussions with a key employee or employees. Those folks need to know what you expect and exactly what you would want to happen in your absence.

This is not something to spring on an employee without a great deal of preparation. The employee would be taking on new duties with a legal obligation to act as the owner would act. As the power of attorney, the employee would not act as they see as appropriate, but rather how the employee interprets the owner’s instructions.

This is a complicated concept and the individual that is your power of attorney deserves time for forethought, communication, and preparation for the potential scenario.

Most often, the power of attorney is signed and notarized in advance by the business owner, and then held by an attorney or trusted agent. Then, in the event that the business owner is incapacitated on an immediate basis (for example, if they are in a car accident), then the power of attorney can be released, the agent can sign the document, and then immediately start running the business.

Some items to consider in the power of attorney are who would be responsible for communicating with the management team as appropriate. For example, the management team’s accountant may be able to provide specific advice on finance activities, and in some cases you can require that the agent with the power of attorney can get a written opinion from the accountant. You can even detail what those decisions would look like. The same would apply for an attorney or insurance broker. You may have limits on whether the power of attorney can borrow money and how much, without the approval of others.

You can limit the power and scope of the power of attorney so that the agent does have to do some consultation. This is something that I strongly recommend because there is often a great deal of emotion and uncertainty when the agent takes over. Requirements pertaining to advice or counseling from your management team can go a long way in securing a successful agency relationship, as well as helping to preserve the business for as long as possible.

A power of attorney is also something that can be revoked once a business owner is ready to return to part-time management or even full-time management of the business.

Agents are typically compensated. They may receive additional pay or bonuses. The mechanism for compensation should be stated in the power of attorney, as well as restrictions. For example, you may want to include that the agent does not have the power to give themselves a higher salary without the approval of certain individuals. It is also important to consider this containment of power.

Power of attorney is the most secure mechanism to ensure that a transition of power is direct and smooth in the case of an owner’s disability.

Interested in learning more about business succession planning? Check out these posts.