When launching a new business venture, it is likely (and more fun) to focus on strategic planning, growth and implementation. However, it is vital in the early stages to give serious consideration to an exit strategy and business succession plan. Business structures have various lifespans and at some point eventually either dissolve through the termination of the business or require a change in ownership. Arguably, it is easier to navigate this discussion early on in the formation of the business. (If you need a reason to broach the subject, you can always point to the lawyer insisting you have this discussion!) Just as you would engage in estate planning to provide the orderly distribution and maximization of your estate at death, you can and should plan for the death, in whatever form, of the business.
When developing an exit strategy and succession plan, you’ll need to think of various hypothetical scenarios, including the death, insolvency, or disability of a co-owner, as well as the mechanism for an involuntary removal, should it be necessary. Pertinent questions you’ll need to answer are if one or several co-owners are leaving, what is the mechanism for a buy-out, and perhaps more importantly, what is the source of the funds? How will the departing individual’s interest be valued? Is there a mechanism in place to trigger an appraisal? Can a value be determined with any certainty? All too often, we will see buy-out provisions in an operating agreement, but no corresponding provision for funds to effectuate the buy-out.
Even where one is the sole owner, it is important to develop a plan to transition the business to the next generation. Often one’s children are not equally equipped to manage the business.
An unexpected and unwelcome surprise can result when a co-owner dies, and suddenly the surviving spouse inherits an interest in the entity and potentially has a voice in how the business is run despite not having the experience or qualifications to make sound management decisions.
Often, these issues can be addressed in the governing documents of the entity or in agreements amongst the co-owners. By planning, one can avoid unexpected friction, an abrupt insertion of a new co-owner or a lack of funds when a buy-out is necessary, as well as the termination of a heretofore profitable business. If you have questions, please contact PLDO Attorney Leah A. Foertsch in our Boca Raton office at 561-362-2030 or email lfoertsch@pldolaw.com.
Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.
