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Business Succession Planning
Business owners are often so busy with the
day-to-day issues of running and growing their companies that the issue
of business succession is often overlooked or left on the "back burner"
until it's too late. What would happen to your business if you were to
disappear from the scene tomorrow due to disability or death? Would your
co-owners, managers, employees, and family members know what to do, and
would they have the guidelines and tools they would need to keep the
business moving forward?
10 Steps to Success
There are many ways to approach succession planning, but there are some
basic steps that should be taken, in order to create a comprehensive
plan able to stand the test of time:
- Don't wait! Deal
with the issue of succession planning now.
Your family's financial security may depend on it. Start the process
now, and follow it through to completion.
- Assemble a team
of professionals.
Because business succession planning involves a number of different
disciplines, you will want to obtain assistance from your key
business and estate planning professionals, including your attorney
and accountant, as well as tax and insurance professionals. Meet
with them, preferably together, to review your succession plan
requirements, and direct them to work together as a team to achieve
your objectives.
- If you want your
business to continue after your death, choose an appropriate form
for your business.
The form of business you choose has tax, liability, legal, and
business implications. If your business is established as a sole
proprietorship or a partnership, it most likely will not continue in
existence after your death. To help ensure the continued existence
of your company in the event of the death or incapacity of you or
one of your partners, consider converting it to a corporation.
Corporate status provides for "perpetual existence" of the business,
as well as limited liability for the business owner(s).
- Choose and
prepare your successor(s) carefully.
Deciding on-and grooming-a successor may require years to
familiarize him or her with the finer points of your business. Thus,
it is important to select a successor as soon as possible, and one
who will be able to step into your shoes easily and improve the
likelihood of a successful transition. The successful transition to
new company leadership will depend on the person you select, and the
training and experience you provide.
- Create a
business "will" and a buy-sell agreement.
The business will is a comprehensive planning tool that can detail,
in step-by-step format, your plans for the continuation of your
business including the management plan. In your business will, you
may also name your successor.
An important component to a business will is a buy-sell agreement. A
buy-sell agreement can obligate one party to buy, and the other to
sell his or her interest in the business, following a triggering
event such as the seller's (owner's) death or disability. It can be
structured as an entity purchase (redemption) agreement, a
cross-purchase agreement, a hybrid (combination) agreement, or a
"wait-and-see" agreement. Your planning team will be able to assist
you in selecting the structure that will be most effective for your
buy-sell agreement.
- Consider funding
your buy-sell agreement with insurance to enable your chosen
successor(s) to buy the business.
Although a buy-sell agreement can help ensure your business will
remain with your family or business partners in the event of your
death or disability, it is essential for adequate funds to be
available to fulfill the commitments of the agreement. Life
insurance is a simple funding vehicle that helps to ensure adequate
liquidity will be available when a qualifying event brings about the
sale of an ownership interest. Disability buy-out insurance may also
be purchased on the owner(s) to fund the purchase of the business
specifically in the event of a disability.
- Establish a
dollar value for each owner's share.
For most small, closely-held companies, it is not an easy task to
put a dollar value on the business. You will likely need to obtain
an independent appraisal of your business to help in formulating
your buy-sell agreement.
- Develop an
estate plan that assures adequate liquidity to help pay estate taxes
and other final expenses.
Without prior planning, there may be no provision or funds available
to pay estate taxes, which might be significant. You can avoid that
fate by purchasing enough life insurance to help cover the cost of
estate taxes. You may also wish to consider transferring part of
your business ownership to family members involved in the business
using certain gifting or sale techniques. While turning over some
control of the business may be a challenge, it can help shrink your
assets, thereby reducing the estate tax liability.
- Discuss
your plans with all affected parties.
By letting your family and management team know the basic
details of your business succession plan, such as who will take over
as owner(s) and head of the company and why, you will eliminate any
surprises. Going through the business succession planning process
will save your successor and your family a lot of hardship.
- Review and
update your succession plan as needed.
Once your plan is established, make sure to review your
plan periodically with your team of professionals to address any
changes that may be required. If you have a major change in your
business or personal life, be certain to immediately review your
plan and revise it as necessary.
The time and thought you take today in planning
your business succession will give you peace of mind, and will also be
appreciated by your family and business associates. |
