If you are a business owner in Phoenix, Arizona, you should meet with an attorney to create a succession plan. Succession planning is complex and difficult, but an attorney can help you tackle the task.
Why Do You Need a Succession Plan in Phoenix?
A succession plan allows you to strategize what will happen in the event of your retirement, disability, or death. Succession planning is critical to the survival of your business after you are no longer able to run it. Often businesses that don’t engage in succession planning fail during the transfer of ownership. When you are getting your business off the ground, it can be easy to push succession planning to the wayside, but it is important to think about as early as possible.
Succession planning is particularly important if you co-own the business with family members or employ family members to manage the business. Different personalities, goals, and capabilities will have to be considered when you are deciding what the future of your business will be. No parent wants to see their children and relatives fight, so it is crucial to plan for the day when you will no longer be able to run the business.
Questions to Consider When Creating a Succession Plan in Phoenix
There are many questions that you must think about when creating a succession plan. Some questions to consider include:
- Will ownership and management transfer to others or simply wind down and cease to exist? Should the business be sold to benefit you or your family?
- Who will be the successor manager and owner? Does this person have the capabilities to manage the business? Will the employees respect them? Should this person be a family member or someone brought from the outside?
- If there are co-owners, how the interest of the departing owner will be treated?
- What will the tax liability be, and how can it be minimized? Will the business absorb the tax liability?
- Will there be a method to resolve disputes among interested parties?
Steps in Creating a Succession Plan in Phoenix
- Collect Documents
Before creating your business succession plan, you must first gather all relevant documents. This includes copies of current business governing documents (e.g. article of incorporation, bylaws, shareholder agreement/operating agreement, and voting agreements), related-party contracts (e.g. leases, employment contracts, and personal guarantees of business debt) and estate planning documents that might affect ownership, governance, or the succession of the business (e.g. wills, revocable trusts, health care powers of attorney, and durable powers of attorney).
- Business Valuation
Next, you must have a current and reliable valuation of the business. The valuation is necessary for the buy-sell agreement and transfers of ownership.
There are many different forms that your business could take, including LLC, sole proprietorship, general partnership, limited partnership, C corporation, and S corporation. You should discuss with your attorney whether the business should be restructured to help you best meet your succession plan goals. The structure of the business can affect tax liability, operational efficiency, and the transfer of ownership.
- Governance and Buy-Sell Agreements
Through the business’s governing documents and agreements among the owners, you can specify how the business will be owned and governed after you step down from ownership.
One particularly important document is the buy-sell agreement. Buy-sell agreements are legal contracts that reallocate ownership of the business if an owner dies, retires, wants to sell his shares. They include information such as the company’s sale price, the value of each owners’ share, and who can or cannot be a buyer.
- Key Contracts
You should evaluate key contracts with third parties and determine whether they can be renegotiated to be more consistent with the business succession plan.
- Update Estate Plans
With your attorney, you should review your estate planning documents, including wills and trusts, to ensure that these documents are consistent with the business governance documents and ownership decisions. Certain areas that should probably be addressed include allocation of voting rights, allocation of business interest, allocation of important business assets, the specific use of life insurance, and the source of funds needed to pay estate taxes.
- Plan For Retirement
When engaging in succession planning, it is important to plan for your retirement and confirm that you will have sufficient resources to support yourself after you no longer own the business. To protect yourself, your retirement should not be reliant on the success of the business after you hand it over to its new owners.
Your New Business Planning Lawyer
The unexpected happens, and it is never too soon to talk to an attorney about creating a succession plan. Nicole Pavlik is an experienced new business planning lawyer Phoenix, AZ helping area residents build and protect their new businesses. If you have questions about succession planning, call Nicole Pavlik Law Firm today at 602-635-6176 to schedule a free consultation.