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Successful business owners often have the opportunity to leave a significant financial legacy to their loved ones. In many cases, they are also in a position to leave their imprint on a company and industry as well. Careful business succession planning, in combination with a comprehensive and assiduously tailored estate plan, can help these individuals to craft the mark they leave in place – both when they retire or resign from their company, and when they eventually pass on from this life. In this blog post, we discuss the role of business succession planning in your estate plan.
Business succession planning is the process of developing a strategy for managing a major business transition, such as a change in business owners or company leadership, and putting preparations in place so that the strategy can be implemented efficiently when the time comes. The positions within an organization’s structure that call for business succession planning can vary somewhat, depending on the size of the business and the nature of the industry in which it operates.
The Ohio Employee Ownership Center (OEOC) at Kent State University explains that estate planning is focused on developing strategies to facilitate the orderly transfer of property upon an individual’s death, while business succession planning is aimed at preparing for the transfer of business ownership and management. If you are a business owner or partner, there is a strong chance that you will want to include some provisions for business succession planning in your overall estate plan.
Businesses in highly regulated industries, such as medical practice or financial advising, are often required to submit written succession plans as part of their business formation processes. How these requirements are enforced varies by industry and in many cases also by state, but as a general rule succession plans required to meet regulatory or professional oversight obligations are typically oriented around strategies for ensuring the confidentiality of sensitive records and the continuity of services provided to clients. Even in professions for which the laws in a state do not require submission of a written business succession plan, there may be laws or regulations that mandate some elements of a business succession plan; for instance, Ohio’s Administrative Code Rule 4731-27-03 requires a physician closing or selling their medical practice, or the health care entity with which they have been employed if the business is remaining even though the physician departs, to provide all patients with specific information related to the termination of services and options for seeking care from another medical professional.
This type of succession planning is important, but it may not do much to safeguard the health of the business once it passes out of your own hands. To make your business succession plan also a plan for business success, you will likely want to take into consideration the difference the authors of a 2009 article in the Journal of Oncology Practice draw between emergency succession plans and “departure-defined” succession plans. Available to the public through the National Library of Medicine (NLM), the article offers business management advice geared toward physicians – but the distinction between succession planning for emergency transfers of business ownership and leadership vs. those that take place as culminations of a long-anticipated passing of the torch can be helpful across many different industries and professions.
If your business is subject to regulatory requirements concerning how clients will be handled in the event of your retirement or extended absence, then obviously you will want to make sure that any business succession plan you establish will meet those requirements. Otherwise, or once the mandatory standards are met, the two factors that are likely to affect the elements of your business succession plan are:
Depending on the circumstances under which you envision succession taking place, you may also need to consider dividing business assets between multiple beneficiaries in an estate plan. This scenario often arises for small business owners who wish to leave the family business to their children.
If you are the sole owner of your business, you likely have considerable flexibility over how the business is passed on – including in whether the business is transferred to another owner at your death vs. when you retire. Entrepreneurs in particular often have the ability to choose whether they would like to transfer ownership and management of day-to-day operations at the same time, or prepare a successor to take on their executive role when the entrepreneur retires, while leaving the business itself to a beneficiary designated in a Last Will and Testament or a trust as part of the entrepreneur’s estate plan.
Under O.R.C. § 1776.84, a partner’s only “transferable” interest in a partnership is economic interest, which for the purposes of Ohio law is treated as personal property. The transfer of that personal property is subject to specifications laid out in O.R.C. § 1776.49, but broadly speaking a partner typically has the right to leave his or her share in net profits from the business to a beneficiary or beneficiaries designated in the partner’s estate planning documents. A partner will not, however, be able to use estate planning documents to leave his or her voting rights or other rights associated with the partnership to any loved ones in the same manner. However, a partner who wishes to leave his or her role in the company to another individual – perhaps a junior family member, or a non-family mentee – does have the option to seek the consent of all partners to the entry of a new partner, pursuant to O.R.C. § 1776.41.
Individuals who hold interest in a partnership business may have fewer concerns for emergency succession planning than do their peers who are the sole owners of businesses they founded. In many cases, the other partners in a business can continue operations for a period of time if an emergency befalls one partner and the individual is expected to make a return; if a severe accident occurs and the partner meets an untimely end, then Ohio’s Uniform Partnership Act makes explicit provisions for how that partner’s share in the business should be managed.
Both sole owners and business partners may wish to consider including power of attorney within their estate plans to ensure that a trusted party is prepared to administer business and financial matters in the event that untoward circumstances temporarily keep the business owner from their usual active role. While a business partner will not have the right to transfer “partnership property,” however, a sole owner may wish to consider designating a beneficiary to receive the business itself or, depending on how the business is structured (for instance, as a sole proprietorship or single-owner LLC) any assets remaining once the business concern’s debts have been resolved, in the event of the owner’s sudden death. An Ohio estate planning attorney with Rhodium Law, LLC may be able to help you evaluate the options available in your unique situation.
Business succession planning for retirement can be one of the most fulfilling aspects of preparing your legacy in both the business world and your estate plan. This type of business succession planning is especially applicable to business owners, whether they founded their business or inherited it, who have long maintained an active and crucial role in daily operations and critical decision-making. In an ideal situation, business succession planning for the retirement of a CEO or any individual in a core leadership role should involve extensive vetting of potential candidates who have the qualities necessary to handle the responsibilities associated with the position, followed by a period of mentorship and guidance to ensure that the individual selected is familiar with all aspects of the role and prepared to manage its requirements on their own.
A business succession plan implemented at a business owner’s retirement may or may not be accompanied by a transfer of economic interest. Many business founders who have built their companies from the ground up choose to pass work responsibilities on to the next generation of talent, but retain their right to profits from the business. They may leave this “economic interest” to a single beneficiary, or to be distributed among loved ones, via instructions provided in the business owner’s Will. Alternatively, they may establish a trust to hold their business interest, setting up a method by which they can receive distributions from the business profits during life, while a trustee is prepared to continue those distributions to loved ones after the business owner’s death.
Many of the protocols involved in business succession planning for retirement will be similar for a sale of the business; in some instances, particularly for smaller businesses, the party purchasing the business may actually be the mentee selected to step into the leadership role. In other cases, especially when a “big ideas” entrepreneur is selling their business at a profit to move on to other endeavors, business succession planning may need to be less focused on an extended period of mentorship and more organized around developing clear, thoroughly-documented operational protocols and carefully detailed and annotated accounting ledgers and, if applicable, client registers. Letting the practical needs of the incoming ownership guide the business succession planning process for sale is often helpful in putting the business itself up for continued success. After the sale, the former owner has the option to place their profits in a trust, designate them to one or more beneficiaries in an updated Will, or reinvest them in further enterprises.
Business succession planning can be a complex undertaking, especially when you also want to ensure that the profits from your years of hard work live on to benefit loved ones after you are gone. Contact Rhodium Law today to arrange a consultation and gain personalized assistance with integrating your business succession planning into your long-term estate plan. Reach our Cleveland office from anywhere in Ohio by calling (216) 699-8145.
