Running a business often means making decisions that affect more than the present. For California business owners, choosing who will take over can shape the company’s future, employees’ jobs and the value passed to family members.
A successor may be a child, business partner or key employee. However, choosing someone simply because of a family connection may not be enough. Considering the person’s skills, experience and ability to lead can help create a stronger transition plan.
Starting with the right successor
Nearly two-thirds of family businesses do not have a succession plan that is both documented and communicated. That gap can create problems when an owner steps away and family members, employees or business partners have different expectations about who should take control.
For California business owners, choosing a successor involves more than naming a relative. Considering the person’s experience, leadership skills and knowledge of the company can help determine whether they are prepared to manage employees, make financial decisions and maintain customer relationships. For example, a child who has worked in the business for years may know its operations well but still need management experience before taking over.
Starting these conversations early can also give a potential successor time to build the skills needed for the role.
Putting the plan in writing
After identifying a potential successor, documenting the transition plan can help reduce disputes later. Several parts may need attention, depending on the business structure and the owner’s goals:
- Buy-sell agreements can establish who may purchase an owner’s interest and how the purchase will work.
- Valuation terms can provide a method for determining what the business interest is worth.
- Funding arrangements can help provide money for a buyout without forcing the business to use operating cash.
- Estate planning documents can help coordinate the transfer of business interests with the owner’s broader estate plan.
Reviewing these documents together can help keep the succession plan consistent. Legal assistance can also help identify conflicts between business agreements and estate planning documents before a transfer occurs.
Planning for what comes next
Naming a successor is only one part of preparing for a business transition. California owners may also need to consider what happens if the owner dies, becomes disabled, retires or leaves the company unexpectedly.
Starting the planning process while the business is operating normally can provide more time to train a successor, address funding concerns and update documents as circumstances change. A clear plan can give the next owner a better chance of keeping the business moving forward.