Dr. Adrienne B. Haynes, Esq.

In the excitement and hustle of running your own business, it can seem like a downer to consider life after your business or your own mortality. Because we have to recognize that we won’t live forever, planning for your exit is a necessary part of overall business strategic planning.

Succession planning is the systematic approach to preparing a business for the exit of ownership or management by building a pipeline for recognizing and developing talent and value.

Being intentional about exit planning from the beginning gives you a plan and less unknowns, and makes it easier to remember what you’re working for. We tell our clients that if they fail to plan, they plan to fail! Entrepreneurship and business ownership is more than a trend, it’s the responsible, consistent work of developing an entity that is separate and strong enough to exist separately from you, as an individual.

Companies are typically transferred through either an internal or external sale or by closing the doors, and the data shows that less than 30% of small businesses have a written succession plan (much higher for SEED Law clients, of course!). Some companies are built with a specific intention to be sold, and others are designed for lifetime engagement from the owner. Either way, being mindful of your exit terms is important.

When considering succession and exit planning as an entrepreneur, following factors should be weighed:

Business Value: Without a plan, the business and the owner die on the same day. It is very difficult to sell a company that has suffered an unexpected, unplanned loss because when something happens to an owner, the value of the company can decrease rapidly. Being intentional about strategies to increase business value over time can lessen the blow of this factor.

Taxes: If there is not plan in place at the death of the owner, the value of your estate, including the company, can be negatively impacted by estate taxes. The estate tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death.

Risk: Succession planning takes time and requires documentation, follow up, multiple professional advisors, and ongoing review. The longer you want to develop a plan, the available options for transfer decrease as time passes, making it more likely that the plan will not meet your intended goals.

Control: When you make a plan and have the confidence of being proactive, you’re more in control of your exit. Businesses give the owner a deep sense of identity and economic security and able to transition on your own terms is dignified. Without a plan, external parties and government regulations will make default decisions on your behalf.

When you’re already in business, give yourself 3–5 years to develop and implement your plan. Most payouts take 5–10 years to complete, so the plan should consider a long-term future. If you’ve done the seven steps to a succession plan and you don’t like what you’ve found, there may be strategies you can implement to build business value through systems, processes, and guidance from professionals. Once your plan is created, it should be signed, stored, and reviewed every 1–2 years as well to account for any leadership, business, or legal changes.

Lastly, engage professional service providers who have experience and that you trust can give you wise counsel. This article is an overview of business succession and exit planning considerations and does not cover every legal right or obligation, consideration, exception, or restriction. These decisions are complex, and should be well researched and discussed with professionals before being made.

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Thanks for reading!

My name is Dr. Adrienne B. Haynes and I’m an entrepreneur and attorney based here in Kansas City. My law firm, SEED Law, has been partnering with business owners across the Northeast and the city for over 10 years. I loved living in the Northeast and I was fortunate to serve as an Entrepreneur in Residence for the Kauffman Foundation in 2017. Together with a dedicated group of Northeast residents and leaders, we explored a community designed innovation district pilot program. I was able to present this work during a TEDxUMKC Talk on Community Innovation Design in 2020.

Over the next few weeks, I’ll be contributing articles and resources on small business and estate planning legal considerations. If you have questions, please reach out directly at adrienne@seed.legal.