Business Succession Planning in the COVID-19 Era

Published On: July 20th, 2020

Does the COVID-19 crisis have you up at night worrying about what would happen to your business if you weren’t around to shepherd it?  Has it provoked you to reassess your priorities and finally make that plan to retire or change your focus?  Like many small and mid-sized business owners, you’re likely so accustomed to charging full speed ahead and working long hours that the recent COVID-19 crisis and changes in work patterns that it forced on many of us gave you an opportunity to pause and think about business succession planning.

Business succession planning is one of those things that many people view like going to the dentist or picking up that novel we have been meaning to read.  “I just can’t spare the time right now; I’ll catch up in six months” or “I’ll take this on vacation and think about it then when I have time.”  Think of the COVID-19 crisis as the abscessed tooth:  it won’t be ignored.  This short article lists a few key considerations to be thinking about if the idea of succession planning for your business is finally moving to the top of the pile.

 

1.    Succession planning comes in many forms and is not “one size fits all.”

    Business succession planning in its simplest forms may mean the sale of your business, but the form of that sale can take a variety of paths.  Prospective buyers can range from financial investors to competitors to key employees to an Employee Stock Option Plan.  Owners can fully exit as part of the succession plan, or they can stay on in an active or limited role for transition.  There are tax implications that must be considered as part of any succession plan and, for many businesses, regulatory considerations as well.
 

2.    Owners need to think about others’ perspectives.

    One of the biggest hurdles I face with many clients who come to me to discuss their business succession plans is that they are myopically only thinking about their own wishes and perspective.  When it comes time for an owner – especially a founder – of a closely-held business to plan for his or her exit strategy, there is a natural inclination to think that the plan is all about them and what they “need” in order to retire/sell.  It frequently never occurs to them to think about what the buyers may “need” in order to proceed with the purchase.  This viewpoint can be particularly dangerous when the succession plan involves selling to employees who have received a W-2 paycheck all of their careers and who may not necessarily have an entrepreneurial view of the risks and rewards of business ownership.  One of the most difficult things we do as business people is put ourselves in others’ shoes.
 

3.    Late starts in planning increase risk of failure.

Call your advisors early and periodically throughout the process.  There is nothing more disappointing to a business owner than negotiating a deal, taking the terms to his accountant and lawyer and then finding out that the deal he or she negotiated has significant legal or tax issues.  If you involve your advisors early in the process, you will have an infinitely better chance at a successful, smooth transaction by getting all of the key issues out in the open and understood before you start the negotiation process.
 

4.    Get your house in order.

    It is ideal to meet with your CPA and attorney at least a few years before you start seriously implementing your exit plan.  This will give you ample time to plan for alternatives, explore possibilities with key employees for their assumption of new responsibilities and managing the financial aspects of your business in order to maximize return.  I find it very helpful to walk through a due diligence checklist with my clients who intend to sell so that they can see the types of questions and documentation that a buyer may ask for.  Early planning and organization will allow you to put your best foot forward when it comes time to exit.
 

5.    New lessons learned.

    While the COVID-19 crisis – like any other time of crisis – has caused many business owners to revisit (or start thinking about) their business succession plans, there have been some new lessons learned this time around.  First, all contracts, whether run-of-the-mill commercial contracts or full asset or stock sale document should have language taking into consideration the impact of a pandemic.  Many standard force majeure clauses may not be interpreted to cover a shutdown or slow down due to a pandemic.  Results can be devastating depending on which side of the transaction you find yourself.  We are encouraging all business clients to revisit their force majeure clauses in all written agreements. Secondly, the implications of the new regulations on employee benefits in light of COVID-19 can create new financial obligations for employers.  It’s important to consider these in the context of a business sale transaction.  Finally, for clients who are on the verge of selling their businesses soon, the implications of any PPP loans and their forgiveness also must be considered as part of the due diligence and sale terms.

 

For business owners seeking a consultation on succession planning or other commercial/transactional matters, please contact our office for a consultation.