Owning a successful small business can be one of life’s greatest accomplishments. However, as you near retirement, it is difficult to envision what will happen with your life’s work. If you or one of your business partners passes on without a succession plan, the interest in the business falls into the hands of their heirs. You may find yourself unintentionally in business with your partner’s spouse or children.
Developing a solid business succession plan will give you and your partners peace of mind that your company and its future are in good hands.
Creating an exit strategy should be as much a part of your business plan as a Profit/Loss Statement. Succession planning ensures a smooth transition not only in retirement but also in the event of death or disability. Business advisors will tell you to start as early as possible. If you feel you are too busy with day-to-day operations to get started, then seek the assistance of a financial planner who specializes in succession planning.
Selecting a Successor
In the event of death or retirement, how will ownership in the company be transferred and to whom? Whether you designate a family member or trusted employee, weigh the strengths and weaknesses of each possible successor and objectively base your decision on what’s best for the business. Consider demonstrated leadership skills, intuitive business sense and ability to make quick, insightful decisions.
If you have a partner, selecting a successor should be a joint decision. You may decide to simply sell your position of the business through the establishment of a buy-sell agreement.
Assigning a Dollar Value to Your Business
To transfer ownership in the business, you need to have an idea of what ownership in the business is worth. Determining a dollar value for your business can be done through an appraisal by a certified public account, an arbitrary agreement between partners or the market value of a share if the company consists of publicly traded stock. By assigning worth to your business, everyone from family to partners agree in advance to a fair price, and partners can buy out the remaining share to everyone’s satisfaction.
Purchasing Life Insurance
In the event of a partnership, each partner should purchase a life insurance policy that covers a buy-out in the event a partner passes unexpectedly. Life insurance policies can be acquired through one of two methods:
- Cross-Purchase Agreements where each partner buys a policy on the other partners and serves as owner and beneficiary. If one partner dies, the remaining partners collects on the policies and uses the money to buy-out the deceased partner at an agreed-upon price.
- Entity-Purchase Agreements where the business itself purchases a policy on each partner and is assigned as beneficiary. Upon the death of any partner, the business will use the policy to buy-out the deceased partner. The cost of an entity-purchase agreement is typically tax-deductible.
Purchasing life insurance assures family members a fair price for their portion of the business and enables payment to be made in a timely manner. This approach further protects the business, keeping it out of jeopardy of a take-over or restricted cash flow.
Business owners that are ready to start developing a succession plan will be well-served to seek the advice of a skillful financial advisor who can help cut through the clutter and separate accurate information from hype.
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