It is inevitable that if you are running a business then one day you will leave it.
Whether you exit by selling up, retiring or otherwise, it is important that you plan for that day in advance so as to maximise your return on that investment.
A good succession plan prepares for how you will achieve that exit by identifying who will take over your business when you leave and by setting out the steps that should be taken in advance to help your business transition smoothly to its new owner.
Planning your exit early will help you maximise the value that you receive for your business when it is sold to ensure that it accurately reflects the investment that you have put in.
To be effective, a succession plan must be realistic and achievable. The expectations of the owners must reflect a goal that is attainable. Only business presented in top condition, with all of its affairs in order will achieve a high sale price.
Grooming a business for sale should begin well in advance of the date on which you intend to leave. This allows for plenty of time in which to prepare your business so that it can be shown in the best possible light.
Create a realistic timetable identifying the key dates leading up to the sale date and stick to this timetable. It is far too easy to put things off.
Where there is more than one owner in the business, ensure what is decided regarding who exists the business and when is captured in writing. This can easily be done in a Shareholders Agreement.
Shareholders Agreement
A shareholders agreement is a contract between business partners and/or shareholders, in a business that identifies:
• how the key decision of the business are to be made;
• how certain ownership or voting rights are to be exercised;
• how disputes between the shareholders are to be settled; and
• how ownership interests are to be transferred between the owners of the business.
A shareholders agreements enable the shareholders to agree in advance when and how business owners are going to exit the business so as to minimise the risk of disputes. Well drafted agreements will identify each shareholders’ rights to transfer their shares in the business to other people (internally and externally), the triggers that activate those rights, and procedures that are required to implement those transfers. The agreement can include provisions entitling shareholders to buy each other out and the mechanism for valuing shareholdings that are not sold on the open market (often determined by a valuation from an independent expert).
A shareholders agreement can contain provisions to prevent shares being sold externally without the remaining shareholders having first right of refusal before they are sold. This is particularly beneficial in family owned businesses where an agreement can be used to ensure the business remains in the control of the family by restricting who may become a new owner or part owner of the business.
It can also provide for how someone exists the business in the event of ceasing to be a family member. An agreement can require the shareholders (or their estates) to sell shares in a business to the remaining shareholders in the event of death, disability, resignation, retirement or divorce.
Succession Plans are an essential part of owning and running a business.
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Disclaimer
Ashbrooke Law publications are intended to provide guidance and general information. They should not be relied upon as legal advice. Formal legal advice should be sought on matters of interest arising from this article.