Robert E. Fravel

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Attorney At Law

Business Succession Planning is Critical for All Small Business Owners

May 4, 2021 | Blog Posts | 0 comments

By Robert E. Fravel, Esquire

I cannot overstate the importance of business succession planning enough, especially for small business owners or business owners who are nearing retirement.  Having a succession plan in place early provides a smooth transition and also helps mitigate any negative effects that go along with the owner’s exit from the business (whether voluntary or due to death). Here are some points to keep in mind when considering a business succession plan.

1.     Will the Business Continue?  The most basic choice in any business succession plan is deciding whether or not the business will continue after the owner leaves.  Some owners simply wish to liquidate all the business assets and shut down, while other wish to see the business that they have built continue on after they are gone.  If the owner decides to continue the business, then the next step is choosing a successor. 

2.     Choosing the Successor.  The successor chosen by the owner is typically a family member or current employee who has a working knowledge of the business.  Choosing a successor well in advance makes the transition much smoother as there is never a lapse in leadership atop the company.  Furthermore, if the business has any employees, having someone immediately stepping in reduces stress and panic among employees. 

3.     Valuation Upon Death or Purchase.  If there are multiple owners, one big issue will be how the business shares are valued upon the death or removal (voluntary or involuntary) of a shareholder.  The best way to combat this issue is to have a set valuation method contained within a signed shareholders agreement.  With that in place, it will make the acquisition of the outgoing/deceased shareholder’s interests much easier on the business and take up much less time. 

4.     Manage the Debt of the Business.  Lots of small businesses have lines of credit or bank loans which aid in the operation of the business, and while the business owner who received the loan is still living, this practice usually works fine.  However, if the owner dies, the bank or lending institute will almost always call the debt and demand repayment of the loan.  This can be devastating on a business’s cash flow and effectively bankrupt a business if not managed properly.  A good business succession plan provides a method and information on how to manage the company’s debt repayment without jeopardizing cash flow.  The selection of particular assets to manage debt repayment should be established within the business succession plan. 

It is extremely important to document and conclude any and all business succession plans you wish to put in place.  The best way to do this is to sit down with an experienced attorney in your area and create a custom business succession plan that is tailored to the needs and wishes of you and your company.