Legal Strategies

Nils Johnson Jr., Johnson & Johnson Law Office:
Succession Planning: Not to Be Delayed

February 7, 2018

Will your business outlive you? In my experience, the value of a small business or professional practice quickly vaporizes upon a key owner’s death in the absence of a clear succession plan. This is especially true for businesses whose main assets are strong customer/client/patient relationships.

Goodwill has very real – but ephemeral – worth, and absent a plan, successors to the business must make essential decisions without the deceased owner’s knowledge, resources or valuable handshake. Meanwhile, clients, patients and customers forge new loyalties with competitors. Longtime staff members consider employment opportunities with a sharper future.

Proprietors of small legal, medical or other businesses are optimistic, hard-charging and entrepreneurial creatures who often prefer the independence of working alone, or with few partners. Those characteristics – useful in launching and nurture a practice or business – often result in reluctance to plan for a career’s inevitable downslope. Is there a logical in-house successor who can carry on the business profitably? If not, how can the owner’s interest be sold to a third party for the best price for his loved ones?

If you have a partner, fellow shareholder or LLC member, it is highly advisable to have a buy-sell agreement in place to deal with unexpected death. Such agreements typically:

  •  Give the business itself an option to purchase the interest of the decedent.
  •  Afford surviving partners/shareholders the option of buying the interest, if the entity declines to do so.
  •  Treat the rights of family members. (Do remaining partners want a surviving spouse as a partner?)
  •  Provide a metric to value the business.
  •  Provide a financing mechanism to buy out a decedent’s interest.

A sole business owner or professional practitioner bears special challenges in planning for death or disability. In medical emergencies, who will cover the owner’s day-to-day responsibilities? Upon death, who can continue operations while the business markets itself for sale? Disability or business interruption insurance can help with short-term setbacks, but what about long-term or permanent ones?

Sole proprietors should plan for unexpected death or disability by having a plan for survivors that:

  • Identifies likely buyers, be it a potential third-party purchaser or employee.
  • Identifies the key staff who would be able to keep the business running, pending a sale.
  • Suggest raising salaries or incentives to hold crucial staff and maintain the status quo while a buyer is sought.
  • Identifies a business broker to market the business for sale.
  • Urges contact with relevant professional or trade associations to secure “fill-ins.”

Sometimes the location of an office/business is a key component of its value. If one owns a building, fine. However, trying to sell a practice or business for full value where a lot of the goodwill is tied to a given location is problematic, if only a short time is left on a lease. In late career, holding options to extend leases is important and this should be part of the plan.

In my experience nearly all the sales of small-shop businesses or professional practices resulting from death would have benefited from even a cursory review of the above issues before they arose.  All business owners should begin informal conversations with potential buyers as they approach their 50s or 60s, or sooner if health issues arise. These conversations need not bind the owner to a future sale. But, they may give successors a few valuable leads when the time comes.

Published by The Business Journal, Youngstown, Ohio.