Is Your Business Succession Plan Ready for Your Retirement?

Business succession planning involves creating a strategy for transferring ownership when an owner leaves, retires, or passes away. Succession planning is essential for ensuring a smooth transition of ownership, either in the long-term or during unexpected events to safeguard the business’ future. Common types of business succession plans include:

• Long-Term Plan: This prepares for eventual transfer of ownership and requires regular review and updating as the company’s needs change.
• Emergency Plan: A plan for sudden ownership changes due to unexpected circumstances, such as serious illness or death.

What Are the Key Elements of a Business Succession Plan?

Business succession plans need to be tailored to the specific business and its requirements. However, some key elements are common in every business succession plan, including:

• Valuate the Business: Determining the business’s value is critical to financial planning and buy-sell agreements.
• Identify the Successor: Select a family, employee, or third-party successor based on the individual’s skills, resources, and other specific traits and their impact on the business.
• Strategic Plan: Assess the business’s current state and future direction and identify and address potential risks.
• Financial Plan: Set clear financial goals, establish resources and assets, track cash flow, and plan for future growth and potential tax implications.
• Legal Plan: Establish trusts, wills, and buy-sell agreements to ensure a smooth transition and avoid disputes.
• Ownership Transition: Create a multi-year strategy detailing how the transition will occur and who will take over.
• Communication Plan: Ensure all employees, customers, and partners, are well-informed about the succession plan and its details.

What Are Maryland’s Laws Regarding Business Succession Planning?

Maryland imposes an estate tax on the transfer of assets at death, which affects a business’s value. Federal gift tax regulations still apply, and there is no state gift tax.

The structure of the business also impacts succession and carries distinct legal and tax implications, such as:

• Sole Proprietorship: Transfer of singular ownership is simple; however, there are significant tax implications.
• Partnership: Partnership agreements should outline transfer processes, including buy-sell agreements.
• Corporation: Ownership can be transferred through stock sales per corporate governance rules.
• Limited Liability Company (LLC): Operating agreements should specify transfer of ownership procedures, potentially requiring approval from other members.
• Trusts: Establishing trusts simplifies the process, avoiding probate and minimizing estate taxes.

Business succession planning presents certain challenges, particularly in family-owned businesses. Family dynamics and conflicting goals can create complications and disputes, and tax issues can cause significant liabilities. To avoid these complications, working with an experienced business lawyer can help ensure all issues are considered and effectively managed.

How Do I Determine the Best Successor for My Business?

Selecting a successor for your business depends on its type and legal structure. In a family-owned business, succession may transfer to a younger family member, involving both family dynamics and practical business decisions. In non-family-owned businesses, a succession plan might include selling business interests to a partner, employee, or third party.

When determining a successor for your business, evaluate their strengths and weaknesses, their willingness to assume ownership or leadership, and their implementation of training and mentorship to ensure they are adequately prepared.

What Are the Risks of Not Having a Business Succession Plan?

A comprehensive business succession plan is essential for ensuring the smooth transition of leadership and ownership. Many risks can jeopardize the business’s stability and future without a plan, especially in small or family-owned businesses. Common risks include:

• Diminished Value: Without the transfer of ownership, the business may lose clients and customers due to uncertainty.
• Lack of Trust: Extended transitions can cause stakeholders to lack confidence.
• Loss of Skilled Employees: Employees, particularly in key management positions, may leave due to a failure of leadership.
• Competitor Vulnerability: Competitors can exploit the company’s vulnerable situation to increase their own position.
• Internal Conflict: Lack of business leadership can lead to internal disputes.
• Unqualified Leadership: Hastily chosen successors may be unqualified or incapable of leadership.

Business succession planning can be complex and time-consuming. It is vital to seek guidance from an experienced Maryland business lawyer as soon as possible to understand your options and ensure a properly developed succession plan.

Annapolis Business Lawyers at Oliveri & Larsen Help Business Owners Navigate Business Succession Planning

Planning for your business’s future is essential to ensure its success, and transferring ownership is vital to ensure longevity. If you do not have a succession plan or need to review an existing plan, our experienced Annapolis business lawyers at Oliveri & Larsen can help. Call today at 410-295-3000 or contact us online to schedule an initial consultation. Located in Annapolis, Maryland, we serve clients in Ocean City, Anne Arundel County, Baltimore County, Baltimore City, Calvert County, Harford County, Howard County, Queen Anne’s County, St. Mary’s County, Worcester County, Kent County, and the upper and lower Eastern Shores of Maryland.