Understanding Succession Events: Definition & Implications

A succession event, in economic terms, is the occurrence of an event wherein one of the two parties involved take on the legal powers, assetsTypes of AssetsCommon types of assets include current, non-current, physical, intangible, operating, and non-operating. Correctly identifying and, or obligations of the other party. Succession events usually occur when business or legal circumstances require the party involved to pass on its obligations, assets, or such to the other entity involved. Generally, circumstances of retirement, death, insanity, liquidation, obsolescence, etc., lead to events of succession.

Summary:

• A succession event, in economic terms, is the occurrence of an event wherein one of the two parties involved takes on the legal powers, assets, or obligations of the other party.
• Generally, circumstances of retirement, death, insanity, liquidation, obsolescence, etc., lead to events of succession.
• Planning is of primary importance for a business in relation to its succession events. Most businesses formulate a well-documented plan when it comes to such events, planned in full confidence with a legal team and updated regularly.

Planning for Succession Events

Planning is of primary importance for a business concerning its succession events. Most businesses formulate a well-documented plan when it comes to succession events – planned in full confidence with a legal team and kept updated every now and then. Planning for a succession event is of utmost importance because it is highly likely to be a sudden event. Such situations are most likely to arise following death, disability, or debtSenior and Subordinated DebtIn order to understand senior and subordinated debt, we must first review the capital stack. Capital stack ranks the priority of different sources of financing. Senior and subordinated debt refer to their rank in a company's capital stack.  In the event of a liquidation, senior debt is paid out first. Hence, a succession plan can be very well considered to be a “will” for the business.

Execution/Implementation of Plan

Succession events are carefully executed through “wills” for the business, wherein the owner succeeds the business with a will, carefully detailing the allocation of power, leadership, assets, finances, and so on, following his or her exit. The most common means by which a business succession is executed are as follows:

1. Passing on the business to a successor

In most family businesses, the successor is always the eldest family member following the succeeded. In other cases, it may be passed on to a senior-level manager or trustee of the company. The main advantage of such a practice is that there is minimum outside or third-party involvement, while at the same time ensuring the business stays in the family or within the business circle.

2.  Acquisitions, mergers, or selling off the business

Some businesses plan their succession events in a way that is the most profitable. Succession is planned such that the business is sold off or merged with another when it is at its most profitable stage. In this manner, a regular flow of income or surplus cash flow is ensured, and at the same time, succession is carried out smoothly and in a timely manner.

Benefits of a Well-Planned and Well-Executed Succession Event

• The business owners’ families are taken care of on account of unexpected death or disability.
• A steady growth without turbulence is ensured for the business.
• Employees are not put in an at-risk situation.
• It ensures a competitive advantageCompetitive AdvantageA competitive advantage is an attribute that enables a company to outperform its competitors. It allows a company to achieve superior margins over businesses that did not invest an appropriate amount of time in succession planning.
• It ensures stability and smooth functioning of business in spite of a sudden succession event.
• It ensures mitigation of all potential risks to the business.
• It ensures the perpetuity of the business.
• A well-planned succession plan instills confidence in the company’s customer base, hence ensuring the smooth functioning of the business.
• A well-planned out allocation of assets and finances avoids government or legal interference in the absence of a will or a succession plan.

Additional Resources

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