Should you also consider a business succession plan, and how would you know if it’s right for you? Virtually all successful businesses, whether they are sole proprietors, partnerships, LLC’s or corporations, should plan for the eventual transfer of business ownership, at a minimum.
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.
The 4 Primary Reasons To Consider a Business Succession Plan
While there are truly more, these are the four utmost important reasons a business owner should consider a business succession plan of some kind:
- 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 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.
Life and disability insurance on key people solves the potential risk problem, and alleviates having to make tough decisions in an impromptu manner.
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 and disability income insurance on the lives of each business owner can provide peace of mind and assure the owner’s desires are satisfied.
The buy-sell agreement outlines the predetermined 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.
A proper plan allows for proper valuation as well, which prevents an all too common event, called a fire sale, where the business is forced to make a less than desirable measure in order to meet immediate needs, often resulting in a loss.
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, either. The implementation of a business continuation plan effectively deals with the business transfer at an agreed upon 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.
According to a Small Business Owner’s Report, completed by LIMRA International in 2005, only 26% of small business owners have some type of succession plan in effect.
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?
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.