All successful
businesses, whether sole proprietors, partnerships, LLC’s
or corporations, should plan for the eventual transfer of
business ownership. Business succession planning addresses
the death, disability or retirement of a business owner as
well as the sale of a business owner’s interest. A
sound business succession plan will assure that the business
owner’s objectives will be accomplished and the most
effective business transfer is realized.
Primary Reasons for Business Continuity Planning Include:  Minimizing
Business Risk
Planning
for Contingencies
Maintaining
Control of the Business
Dealing
with Competing Interests
Minimizing Business Risk
The primary reason for business succession planning is to
assure that business risk is minimized. Strategic business
planning addresses all potential business risks including
the loss of a key employee, the death or disability of a
business owner, the under or over valuation of the company,
the sale of a business owner’s interest and the tax
consequences for both the company and the individual if a
business interest is transferred or sold.¹
Planning for Contingencies
The effects of an owner’s death or disability can
be catastrophic for any business. Effective use of a buy-sell
agreement funded with life insurance and disability income
insurance on the lives of each business owner can provide
peace of mind and assure that the owner’s desires are
satisfied. The buy-sell agreement outlines the pre-determined
sales price and sets forth the guidelines for any ownership
transfer. Life and disability insurance policies can be purchased
to provide the immediate funds needed to execute the terms
of the agreement.
Maintaining Control of the Business
Succession planning with the implementation of a buy-sell
agreement allows the business owners to maintain effective
control of the business. Upon a transfer of ownership, whether
death, disability or retirement, succession agreements typically
guarantee that the former owner’s interest must first
be made available to the successor owners. Therefore, if
a business owner retires, dies or is disabled, the ownership
of the company can be effectively controlled without intervention
from family members or other third parties.
Dealing with Competing Interests
The business owner’s goals may not be the same as
potential heirs or family members. The implementation of
a business continuation plan effectively deals with the business
transfer at a pre-agreed fair market value for the family
and allows the remaining business owners to maintain control
of the company without outside intervention. Without an agreement
in place, there will likely be disputes over valuation or
control issues that may result in costly litigation and ultimately
a liquidation of the company.
“Only
26% of small business owners have some type of succession
plan in effect.” (LIMRA
International, Small Business Owners 2005 Report).
A business succession plan is crucial if you
want to adequately protect your business. Without an effective
agreement in place, your company will experience serious
problems if a death or disability strikes an owner. Where
will the funds come from to pay a disabled owner? What about
the funds needed to buy-out a deceased partner’s interests?
Do you want to be in business with your business partner’s
spouse or family? How will you deal with the loss of revenue
associated with lost relationships with vendors and clients?
Would you have to sell your business at fire sale prices?
Don’t Wait! Call MEG Financial now at (877)
583-3955 with questions or to obtain more information on business
succession or business continuation planning.
¹ Neither MEG Financial nor any of its licensed agents
provide legal or tax advice. Please consult your CPA or tax
advisor for tax questions relating to your specific circumstances.
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