Succession planning for your business is a critical part of estate planning. Learn the key elements to consider when making a succession plan for your business.
Written by: Willful Entrepreneurs are taught to have a solid business plan and how to be the best equipped to solve problems. However, most business owners neglect one key thing: business succession and estate planning.
It seems that everyone plans to hand their business over gracefully through a sale, or by handing it down to someone after they retire. But what happens if you pass away unexpectedly? We buy life insurance to protect our families in case the unexpected happens, but entrepreneurs also need to put plans in place to ensure their business continues to live on. Without a solid succession plan, you run the risk of leaving your business in limbo.
Here are a few key elements to consider when making your succession plan for your business.
1. Document important information
None of us expect to be involved in a car accident or pass away unexpectedly, but it’s crucial to consider your business wishes if you suddenly become incapacitated or die.
Maybe you've thought about whether you would want the business to shut down, continue independently, or be sold. What about, who will replace your role – a current employee or an external hire? What legacy do you want to leave with your business? Whether you have or haven’t thought about the answers to these questions, it’s a good idea to put them on paper - or at least start considering them.
We know it’s important to have discussions with your executor about your funeral and end-of-life wishes, but what about your wishes for your business? Providing answers to those essential questions to your executor will guarantee that you have a clear strategy in place in the case of an emergency. You should also discuss your succession planning with your Board of Directors, important investors, and key members of your leadership team, and put together a plan for the process and communications in the case of an unexpected emergency.
2. Share your wishes with important stakeholders
A key part of planning for the unexpected is establishing and documenting important information that many entrepreneurs keep in their heads. Ideally, every account, password, and process documented is shared with key people involved in your business. But the reality is, that there’s often information that only you know. The critical information should be accessible to either your lawyer, your co-founder, or a senior team member in the event of an emergency. Or provide the information to a family member who can provide access to it in the event of an emergency. Using estate planning platforms like EstateBox and password managers like 1Password is also a great way to ensure all company information is securely stored in the cloud and is accessible by other key members.
3. Include provisions in shareholder's agreements
It's common to think of succession planning as a way to pass on your company but it should also include all of your shareholders, including co-founders, investors, and employees. If you're drafting shareholder agreements, make sure to include a clause that addresses what happens if a shareholder passes away.
Your lawyer can assist you in including provisions into your shareholder's agreements so that there is a clear path for how those shares will be handled in the case of someone's death.
4. Purchase a life insurance policy
Undoubtedly, it would be a major shock to the company and team morale if you were to pass away. The purchase of key person life insurance might help to mitigate the inevitable period of uncertainty that follows the death of a company's founder or management.
Taking up a life insurance policy payable to the company for founders or key executives assures that the company will have a financial injection to help them in the event of the loss of a founder or executive. It also offers your staff time to grieve rather than forcing them to return to work immediately. These policies are a cost-effective way to ensure that if you passed away, your business would have the financial backing it needed to continue operating. They're also frequently required by investors at a particular level of development.
5. Create a will and estate plan
Estate planning is a major part of business succession planning for entrepreneurs.
Every adult with assets (such as a house, a business, or investments), minor children, or pets, as well as those who are married or in a common-law partnership, should have a will. A will determines who gets your assets and who looks after your dependents. If you don’t have a will, the courts will make those decisions for you, leaving your family to guess what you would have desired (not to mention, it could be extremely tax-inefficient for your beneficiaries).
As an entrepreneur, your business is likely one of your biggest assets – so creating a will should be a top priority. Your will typically includes a carry-on business provision, and it permits your executor to make decisions regarding the business (such as selling it, winding it down, or selling your shares), as well as explicit instructions about what you wish to happen to your business. You can easily create a will online with platforms like Willful to cover your basic business needs
In order to avoid probate fees, company owners might also consider preparing a dual will, which divides their business interests from their personal assets. Depending on the complexity of your business, you may want to get advice from an estate lawyer, financial advisor, or tax advisor.
Leave a lasting legacy for your business
The bottom line is that 57% of adults don’t have a legal will. That means over 16 million Canadian adults haven’t protected their families by making a will, and many of them are entrepreneurs, freelancers, or side-hustlers who must consider not only their family but also how their business will live on.
Succession planning will provide you with peace of mind, knowing that not only is your family protected, but your business is left with a lasting legacy.
Willful is an estate planning platform that makes it easy for Canadians to create their legal wills and power of attorney documents online for as little as $99.
While we’re passionate about all things estate planning, we’re not professionals. We recommend speaking with your lawyer or financial advisor when putting together an estate plan.