Authored Articles & Publications Jul 08, 2019

Best in Law: Exits and Elevator Shafts for Small Business Transitions

BB&K’s Brian Reider Writes About Business “Exit” Plans for the Southern California Newspaper Group

Best in Law: Exits and Elevator Shafts for Small Business Transitions

By D. Brian Reider

As the owner of a business, have you given thought to both exits and elevator shafts? Not the kind that get you around a building – the kind that can permanently affect the future of your business.

An “exit” is the way you, or other key persons, leave the business in a planned manner – whether by sale, retirement or some other similar way. An “elevator shaft” is a sudden, unexpected and, unfortunately, final form of “exit” – a death being most common. While similar, they have differences, and require different forms of planning. It is a virtual certainty that one or the other is in your future.

While it is easy to ignore exits and elevator shafts, it can be disastrous for a business if they have not been considered. Making sure your business is ready for them is a vital part of planning, and involves both business strategy planning and legal documentation.

The business planning involves getting the key stakeholders together to talk about the future of the business, and what could happen in a whole variety of situations. How would a death, a disability, a retirement, a sale of the business or a transition to a new generation of owners be handled? Who would take on what role in the business, especially if an elevator shaft is encountered? Who should not be allowed to be involved if certain events occur?

These can be difficult and challenging conversations, and often need outside assistance to guide the discussions. They require coming into the discussion with an open mind and a willingness to hear sometimes uncomfortable points of view. In the end, an effective discussion should lead to a consensus as to what should be done, and how.

Stopping at that point can also be disastrous – without documentation, there is no effective plan. If an event then occurs, (and it will) memories as to what was agreed may quickly fade or change.

Because of this, it is equally critical to engage a legal professional to document the plans that will set out what was decided. A Succession Agreement is a great start – an agreement among all owners as to what will happen if an exit or an elevator shaft moment arises. It should spell out what happens to the ownership interest, and how a transition should occur, by addressing the “trigger events” that give rise to the transition, how the ownership interest is valued, and how it can be purchased by other owners or the entity.

Beyond that, a written continuity plan should be created – not so much a legal document as a set of agreed upon instructions for how to proceed if an event occurs. How is the information about the event to be conveyed to employees, customers, vendors, bankers and the public in general? What is the message to be? Unless this is agreed upon and clear direction is given, there is a risk of employees leaving, customers canceling orders, vendors restricting credit and lenders calling loans. If those constituent groups can be immediately reassured that a plan is in place and it is going to be “business as usual,” many of these bad outcomes can be avoided or minimized.

At the same time, the owners of the business need to be sure that their personal houses are in order by having an up-to-date estate plan that makes it clear what is to happen if they are unable to act while alive, and what will become of their ownership interest on their death. The Succession Agreement and the estate plans should be coordinated to make sure everything occurs without a hitch.

Finally, once all of this is done, each of these plans should be reviewed annually to address any changes in circumstances that might require modification of some or all of the plans. Having an out-of-date plan is essentially like having no plan at all. On the other hand, by following these steps, an owner can have a much greater assurance that the business will have the best chance possible of survival — no matter what happens.

This article first appeared in The Press-Enterprise and other Southern California Newspaper Group publications online on July 6, 2019. Republished with permission.

 

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