Does your Business have a Succession Plan?

In early 2014, Kitchit, a two-year old startup, which connects private chefs with interested diners, was doing well with 8 employees and $600,000 in startup funds.

Then, George Tang, a co-founder of Kitchit and its chief technology officer, died at 24 years old after he was struck by a car.

In the first few years of a new business, business owners often focus on developing and maintaining positive cash flow while concurrently trying to grow his or her business. However, what business owners frequently fail to consider is the issue of succession planning.

Without a formal succession plan, an owner’s interest will pass through his or her estate. This may lead to a circumstance where the remaining co-owners are required to operate the business with the deceased owner’s heirs or unrelated third parties in the event the estate chooses to sell the ownership interest.

Kitchit was extremely fortunate that George Tang’s parents, who live in Beijing and inherited his ownership interest, retained ownership and acted as silent partners. This allowed the remaining co-owners to move forward with the business without any interference, resulting in the company’s growth to 23 employees. Kitchit’s success in its informal succession is an exception, not the rule. New owners who inherit or purchase the deceased owner’s interest may wish to see the company move in a different direction, causing friction with the remaining co-owners of the business or may demand to be bought out, causing intense financial strain on the business. In addition, when the ownership interest that is being passed is a majority interest, the remaining co-owners may be at the mercy of the decisions made by the new owners.

A formal succession plan may include a variety of solutions, including the company’s ability to purchase the deceased owner’s interest in the company or have his or her interest held in trust administered by a trustee who is familiar with the business. Regardless of what it includes, a formal succession plan allows for all owners to have a voice in the future of the company, while eradicating possible disruptions in the operations of the company at the time of an owner’s death. Business Owners, no matter their age need a succession plan – do it now rather than later because later may be too late. Contact Julia Wu or MBM’s Business Law team for more information on succession plans at jw@mbm-law.net or info@mbm-law.net.

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