Business succession planning is a critical strategy for California small business owners. A business succession plan is not one single document–it is a comprehensive set of documents that work together to control what happens to your business when you are no longer at the helm. This could be a temporary situation due to your short- or long-term incapacity or a final outcome such as your divorce, retirement, or death. Done correctly, a business succession plan safeguards your business and its value by maintaining control, protecting family members and co-owners, enabling continued operations, and deterring litigation or a forced sale.

Business Formation, Operating, and Governance Documents

Your business’s formation, operating, and governance documents depend on the type of business entity you own. These documents specify who owns the business, how it is operated, and how the business will be passed on. Not all of these documents are mandatory–but the more intentions you formally document, the more clarity you provide. The documents that must be filed with the Secretary of State are underlined.

While the LLP is limited to certain professions, most licensed professionals may choose to form a Professional Limited Liability Company (PLLC) or Professional Corporation (PC). In addition to the documents listed above, these entities require licensing compliance documents. Further, California law allows only licensed professionals to own these types of entities, which will be an important consideration for any business succession plan.

The Buy-Sell Agreement Is Key

A buy-sell agreement is the key document in most business succession plans. It is a formal agreement between the business owners that describes what happens when a triggering event occurs and an owner’s share must be dispersed.

The triggering events are specified in the buy-sell agreement and may include, for example, an owner’s:

• Death, disability, or incapacity
• Retirement or other voluntary exit from the business
• Involuntary departure from the business such as expulsion or termination
• Divorce
• Loss of professional license
• Bankruptcy or creditor claims

A triggering event can send even a well-established and successful business into a tailspin. An effective buy-sell agreement protects the value of the business by:

• Ensuring the remaining owners retain control
• Keeping out unwanted owners (such as ex-spouses, judgement creditors, or spendthrift heirs)
• Providing spouses and heirs with a clear exit and fair payment

The buy-sell agreement answers one important question: who can buy the ownership interest and how? But there are more questions that must be resolved.

Additional Tools in a Business Succession Plan

A buy-sell agreement must be coordinated with a comprehensive business succession plan to ensure its success. A complete business succession plan includes additional documents that answer four essential questions.

1. Who runs the business if you cannot?
   

   If you are temporarily unable to run the business due to disability or incapacity, these are some of the tools that will ensure continued operations:

   • Emergency authority tools such as a Durable Power of Attorney
   • Interim leadership appointments
   • Signing authority
2. What is the business worth?
   

   If you exit the business and an ownership transfer takes place, having an agreed upon valuation method can keep things moving smoothly and efficiently. Some ways to proactively answer this question include:

   • Specified valuation tools such as a valuation formula or independent appraiser
   • Regularly occurring business valuations
3. How is the ownership transition funded?
   

   Funding can also be an obstacle that prevents a smooth transition. The next owner may not be able to take ownership without an adequate funding tool in place such as:

   • Disability insurance
   • Life Insurance
   • Key Person Insurance
   • Cash Reserves
4. How does the business keep operating during the transition?
   

   Continued operations are essential to the business’s ongoing success. Here are some tools that ensure daily operations continue to run smoothly:

   • Employment agreements
   • Transition or consulting agreements
   • Incentive-based retention plans
   • Business continuity essentials (including passwords, vendor and client contact lists, workflows)

In addition to these tools, a comprehensive approach to business succession ensures that your estate plan is aligned with the succession strategy and that your tax planning strategies are optimized. Further, because California is a community property state and your spouse may have a statutory survival interest in your business, your succession plan should include your spouse’s written consent if your spouse is not the intended next owner.

When Is the Best Time to Put a Succession Plan in Place?

The best time to put a business succession plan in place is now. It takes years to establish a thriving business but only a moment–such as an untimely death or incapcity–to undo all that hard work. If you want to control who owns your business after you exit–whether planned or unplanned–you must provide direction within the business documents and align your estate plan around them.

Generally, the hierarchy of control is:

1. The entity’s governing documents
2. The buy-sell agreement
3. Court orders
4. Your estate plan

Without a business succession plan in place, you are leaving critical business decisions–and your family and co-owners’ fate–in the hands of the court.

Work with an Experienced California Business Succession Planning Attorney

If you are a business owner and do not have a succession plan in place or it is time to review your existing plan, contact the business succession planning team at JDS Law, Inc. A correctly done business succession plan ensures these tools all work together to preserve the value of your business, enabling a smooth transition to the intended new owner. We take a holistic approach and work closely with the other professionals your business relies on to create an effective business succession plan you can count on. Protect the value of the business you worked hard to build. Contact JDS Law, Inc. today.