As a small or medium-sized enterprise (SME) family business owner, you may have spent years building and growing your company. However, have you considered what will happen to your business after you retire, or pass away?

It is very easy to say: “I won’t be here, so it won’t be my problem”, but when you consider the potential damage to your hard-built legacy, and the emotional strain a litigation battle could place on your family and other employees, that belief may change.

Not sure where to start when it comes to succession planning? Read our Succession Planning Guide for Business Owners.

Succession Planning Guide for Business Owners

Succession planning is crucial for the continued success of any family business. A significant aspect of this planning is having proper legal documentation in place, including shareholder agreements, articles of incorporation, and operating agreements.

These documents provide a framework for the company’s management structure and decision-making processes, preventing disputes from arising, defining the rights and responsibilities of shareholders, and ensuring the company complies with legal and regulatory requirements.

Shareholder agreements, for instance, outline the ownership structure and responsibilities of each shareholder in the company, which is particularly important for family businesses with multiple family members involved. Properly drafted articles of incorporation provide a clear framework for management and decision-making processes.

In addition to these foundational documents, operating agreements can be critical for family businesses, outlining the roles and responsibilities of each management team member, as well as the company’s day-to-day operations. These agreements also establish procedures for making decisions, resolving disputes, and handling other operational issues that may arise.

Crucially, in respect of succession planning, such documents can provide clear guidance, and contractual mechanisms, in respect of what should happen if the majority shareholder wishes to leave, or dies. How would a purchase of the shares be paid for? Properly drafted documents, as well as a decent cross-option insurance policy, can really help with that. Shareholders’ agreements and properly drafted articles of association are as important as a properly drafted will, or Lasting Power of Attorney, for many business owners.

If you already have a shareholders’ agreement in place, brilliant. That said, it is important to note that these documents need to be reviewed and updated regularly to reflect changes in the company’s ownership structure, management, and operations. Failure to update these documents may lead to significant legal and financial issues for the business and the family members involved.

The company and commercial team at Scott Bailey LLP are experienced in advising on business structures and succession planning, and regularly prepare or review legal documentation for all manner of SME family businesses. If you are thinking about the next chapter, and want to ensure a successful succession process, why not get in touch? By taking the time to draft and review these documents, you can protect your business, your family, and your legacy for years to come.