Planning business succession: two key tools every entrepreneur should know
Business succession is one of the most delicate issues, and often the most frequently postponed, by founding partners and entrepreneurs. However, experience shows that failing to plan in good time can lead to deadlock situations, family disputes, legal uncertainty and even jeopardise the continuity of the business.
Although we have already discussed in several posts the family protocol and key aspects thereof, such as the Family Council, the incorporation of relatives into the family business and its binding nature, on this occasion we wish to focus on two particularly effective instruments which, in our experience, remain under-used: the lasting power of attorney and the will with a corporate focus.
1. The lasting power of attorney in business succession planning: safeguard against subsequent incapacity
A lasting power of attorney is an instrument of enormous value for entrepreneurs in the context of business succession planning. It is a notarial power granted by the founding partner in anticipation of possible future incapacity, appointing a trusted individual to act on his or her behalf when he or she is no longer able to do so personally.
Its principal advantage is that it avoids the need to initiate judicial incapacity proceedings or the formal establishment of support measures, processes which are usually lengthy, costly and poorly suited to the immediate needs of an operating company.
From a business perspective, a lasting power of attorney also makes it possible to separate the management of personal matters from economic or corporate matters. In other words, the entrepreneur may decide that, although one person is responsible for his or her personal, family or even financial affairs, another person, normally someone already familiar with and involved in the business, will be responsible for managing:
- His or her shareholdings or equity interests.
- The exercise of voting rights at shareholders’ meetings.
- The execution of contracts relevant to the company.
- The adoption of strategic decisions necessary for business continuity.
In this way, the company is not paralysed by a personal situation affecting the founding partner nor subjected to decisions by individuals who, despite the best of intentions, lack knowledge of the company’s operations or its economic reality.
A well-drafted lasting power of attorney may also be structured so that it is activated only in the event of duly evidenced incapacity, limited to specific powers, and coordinated with the company’s articles of association, shareholders’ agreements or existing family protocols.
2. The role of the will in business succession: who will inherit the company
Another essential instrument in business succession planning is the will. Although it may seem self-evident, in practice many entrepreneurs die without having adapted their wills to the reality of their business.
The usual outcome is a fragmented shareholding structure, with equity interests distributed among several heirs with no business experience, the entry of family members unconnected with management, decision-making deadlock and, in most cases, disputes between partners and heirs.
A properly planned will enables the founding partner to expressly designate the person or persons who will inherit the shares or equity interests, within the limits permitted by Spanish succession law. Above all, it allows the alignment of patrimonial succession with the operational reality of the company.
In many cases, the entrepreneur has already identified who is managing the business or who has the capacity and willingness to continue it: a son, a daughter, a partner, a key executive, etc. The will makes it possible to state clearly that the shares or equity interests will pass to that individual, thereby avoiding future uncertainty and disputes.
Furthermore, the will may be coordinated with other mechanisms, such as shareholders’ agreements or family arrangements, in order to compensate other heirs financially without fragmenting ownership of the company. The objective is not necessarily to favour one heir economically; rather, it may be structured so that economic rights are equal whilst political (voting and governance) rights are exercised by the person whom the founding partner considers most suitable to continue the business legacy.
3. Tailor-made business succession
There are no standard solutions in business succession; each company and each family has its own particular circumstances. For this reason, corporate succession planning must be designed on a bespoke basis, coordinating civil, corporate and tax aspects with the aim of ensuring the continuity of the business project and preventing future conflicts.
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