Taylor Legal Blog

The Importance of Property Succession

Posted by Katherine L. Taylor, Attorney and CPA, Chief Problem SolverFeb 11, 20190 Comments

Whether you decide to sell, retire, or leave your business due to health reasons, it is important that you plan for the day you will no longer be able to run your company. Succession planning is a very important part of business planning and is something that you should address when you first go into business. Small businesses have unique challenges if one of the owners or managing partners can no longer fulfill his or her duties running the business, and this is especially true for businesses that have only one owner (sole proprietors) who are responsible for making all business decisions. Simple transactions such as paying bills or payroll may not be able to be done without a court order.

Unfortunately, succession planning is not often a priority among small business owners. A survey conducted by Zen Wealth found that sixty percent of small business owners do not have a succession plan in place.

What this means for your business is that the details of how your business is run could be at risk at any time. Do you even know who will inherit the business? That's the person who'll be making all of the important decisions about how it operates—can you afford to leave that role open to chance?

A succession (or exit) plan outlines who will take over when the owner leaves, and also identifies the best way for the owner to exit the business. Creating a succession plan will help you implement factors far in advance that will future-proof your business for sale or transfer of ownership when the time comes.

Here are some typical problems that a succession plan can address:

  • the business owner “is” the business, leaving the company unable to function without the owner
  • the business is reliant on a few large clients with an undiversified revenue stream
  • there is a non-transferable lease on business properties

All these things are correctable if they are caught beforehand.

A succession plan also allows you and your successor time to prepare for the transfer of ownership. Your successor will need to go through certain training before they'll be ready to take over your business. The time you'll need for adequate training will depend on the complexity of your business. It's best to achieve this training over a gradual period of time, so that you're available to help your successor make the transition. You should not put off this preparation until the last minute.

Lastly, having a succession plan in place is important because you need to know how much your business is worth if you intend to sell your business, which means you have to identify the factors that determine your business' fair value. You should be able to document the changes in your business' revenue over time, thus showing past growth and profitability, which can then be used as estimates for future earnings. The U.S. Small Business Administration (SBA) offers resources to help with your succession planning. If in doubt, it never hurts to consult with an attorney during this planning process.