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Managing and documenting expectations among key stakeholders is very important throughout the succession planning process, and this often translates into legal transactions and documents, such as corporate reorganizations, share purchase agreements, employment contracts, employee share ownership plans and shareholders agreements. All of these arrangements take time and require thought and buy-in from stakeholders. It is rare to see the process of managing and documenting expectations improved by the urgency resulting from the death of the founder, or a last-minute decision for that person to retire or step down due to illness, or the departure of key employees due to uncertainty. In addition, there are specific things that can be done to improve value or obtain tax advantages that will only be effective if started several years before the founder retires.

Vin G. Tsui: A business lawyer’s key role in the succession process is twofold, transactional and planning. On the transactional side, the lawyer puts the necessary structure and contracts in place for the various transactions involved and ultimately effecting the legal transition of the business. On the planning side, the lawyer provides advice and guidance in the planning process, and works with the other professional advisers to devise a sound succession plan.

A proper succession plan involves a myriad of strategic decisions and business transactions. The decisions that are required to effect a proper business transition should not be last-minute ones made on the eve of retirement. The transactions may be complicated and require co-ordination of different professional functions from lawyers to accountants, from financial planners to insurance brokers. Many of the transactions must be put in place years in advance of the intended date of transition. A seemingly simple transaction can have significant implications on different areas of a family business. The lack of planning and preparation in these matters often results in significant financial costs to a family business and exacts a huge emotional toll on the family members.

For example, an owner who hopes to pass the business to the next generation must first assess the potential of the available successors and their inclinations to take over the family business. The preferred successors will need to be groomed to take the helm. Grooming may involve rotation into different job functions inside and outside the business. This process alone requires strategic planning several years before the intended retirement of the business owner.

Contingency plans are needed just in case the preferred successors become unwilling or unavailable to take on the mantle. Reorganization and tax-planning transactions may need to be undertaken in advance of the planned transition, so it can be done in a tax efficient manner. The transition may involve dividing the business into different components. Such division may need to be done two or three years before the planned transition. Let’s not forget the decision as to whether the transfer will take the form of a share or an asset transaction.

All of this may be complicated by rivalries within the family unit. Even where the business transition involves the sale of the business to a third party, the search for a suitable acquirer may take months, if not years. There are also strategic transactions that could be undertaken so that the business owner may get the best price for the business in a sale. These transactions may include steps to purify the company’s balance sheet, clean up the company and properly prepare it for sale. In addition, as the intended business transition date approaches, the owner must critically assess his or her own personal preparedness to let go of the business.

We have only touched on the planning aspects of a succession plan. There are also wills and estate planning, tax planning, financial planning and insurance components that affect the overall succession plan. There are also circumstances such as illness, death and injury that may force a transition of the business well before the intended retirement date. Therefore, any business owner is well advised to put their succession plan in place sooner rather than later, and plan for the unexpected.

Brent Banda: A succession plan involves more than transfer of equity. It involves transferring the business to a new generation of owners who must make complex business decisions.

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