Tips For Creating a Business Succession Plan
It’s vital for any business to have an established succession plan. The succession plan ensures the continuity of the business without unnecessary jockeying and conflict when the current vanguard retires or passes away. The plan also accounts for unexpected events, including what happens to the stakes owned by parties who unexpectedly die or divorce. Without a succession plan in place, conflict is sure to ensue among family members, officers, and other interested parties, depending upon the nature and structure of your business. Below, we offer a few tips on establishing a healthy succession plan. Call a knowledgeable Houston business law attorney with additional questions or for help with a Texas business law or real estate matter.
The plan for succession should be established early in the life of a business. In fact, the succession plan should be built into the governing documents of the business from the outset, to prevent any needless conflict down the line. Many business owners ignore the issue until a partner nears retirement or until something unexpected occurs and they suddenly realize they have no established procedure for moving forward. Business succession is not just determining who will succeed the current owners; it’s a continuity plan, meant to ensure there are no disruptions should an owner or manager unexpectedly leave due to illness or other life circumstances.
Early on, even if you haven’t chosen a particular successor, you can at least establish a process and set qualifications. For example, you might establish job descriptions for key positions and set certain criteria for who can qualify to fill those positions (education, experience, tenure in the company, etc.). You can set up a plan for managers, board members, and even the CEO. The plan should also account for the transfer of ownership for partners, shareholders, or other owners–for example, what happens upon the sudden death or divorce of an owner?
Review and Update Governing Documents, Succession Plan
If there’s no plan already built into the documents, you’ll need to alter the governing documents (partnership agreement, operating agreement, articles of incorporation, shareholder agreements, etc.) to reflect the plan and any changes that have arisen since their original drafting. Even if there is a plan in place, it may need to be updated periodically to reflect changes to the business and significant life events. If there’s been a death, a divorce, or other event that affects the succession plan, make the necessary alterations to reflect the new reality.
Decide Who Will Run the Business
Ultimately, succession is about determining who will run the business after you’re gone, or at least establishing a process for choosing a successor (appointment, vote, etc.) If you have a successor at the business, or you run a family business and wish to choose a family member heir, make that decision based on the best interests of the business. You might also wish to establish a plan to remain in a position of authority, or remain as a consultant, even after you step down as CEO.
Have a Succession Discussion With Interested Parties
If you run a family business and the plan is for the business to stay in the family after you retire or leave, it’s helpful to have an open, honest discussion with interested parties. If you have multiple children or other potential successors, make sure that you establish your succession plan well in advance of retirement and discuss the plan with those family members. You’ll get a better sense of who will actually remain involved with the business in the years and decades to come, making it easier to lay out a plan and avoid family conflict and familial discord as the actual date nears.
Let Employees Know About the Plan
Employees do not need to be, and indeed should not be, involved in the actual planning process for succession. Once you’ve established a plan, however, it’s helpful to keep employees in the loop. Employees may become disgruntled if they feel blindsided by a succession decision–especially if they had reason to think they were in the running for higher office. Your successor will need the cooperation of employees to work for them and, depending on the circumstances, even train them on the ins and outs of the business.
If you need legal assistance with a Texas business law matter, contact a skilled and accomplished Texas business lawyer at the Houston offices of attorney Leigh Meineke at Stephens | Domnitz | Meineke PLLC by calling 832-706-0244.