Do You have a Business Succession Plan?
More than half of business owners have no plans for business succession if something unfortunate happens to them in the form of disability or death. Most are so busy building and managing, that they fail to plan for what cannot be anticipated.
Here are the five most common types of small business succession plans in detail.
1. Selling Your Business to a Co-owner
Partnerships should always draft a mutual agreement that, in the event of one owner’s death or disability, the remaining owners will agree to purchase their business interests. Such a buy-sell agreement helps ease the burden of an unexpected transition. A spouse might be interested in keeping their shares but may not have the time investment or experience to help it blossom. A strategy that enables co-owners to maintain control of the business will assure its continued success.
2. Passing Your Business to an Heir
This option includes children or family members already working in the organization. This option still has complications, but the key is good pre-planning that includes clear directives for the entire family so there are no surprises. The obvious upside is to keep the business within the family, but more importantly the family must be prepared in knowing the operations of the full enterprise.
Before instructions can be given on who will take over leadership of the business, a future leader should be chosen. This is likely to be complicated when more than one heir is interested in taking over. Business owners can reference current business contributions and responsibilities from potential heirs to assist in choosing a successor.
3. Selling Your Shares Back to the Company
Another and relatively simple option in a business with multiple owners is a “cross purchase plan” or a “stock redemption plan”. This is an arrangement where the business purchases life insurance on each of the co-owners. When one owner dies, the business uses the life insurance proceeds to purchase the business interest from the deceased owner’s estate, thus giving each surviving owners a larger share of the business.
4. Selling Your Business to a Key Employee
In the circumstances where there is no co-owner or family member, a key employee might be the right successor. If you have a strong executive or general manager who has been with you since the organization’s early days, this option will generally prove to be more reliable than an outside buyer.
Quit simply in theory, the key employee agrees to purchase your business at a predetermined retirement date, or in the event of death, disability, or other circumstance that renders you unable to manage the business. This is typically funded through some type of insurance plan on the owner.
5. Selling Your Business to an Outside Party
When there is no family member, partner, or key employee, the next logical step is to consider is selling to another business to an entrepreneur or competitor. In this case, proper business valuation becomes critical. Though it can be expensive, bringing in a business valuation firm every five or so years helps create a cohesive long-term valuation that outside buyers will difficulty rebutting. Part of this process includes having a strong general manager or co-executive that can assure ongoing operational competence.
Ascend Financial Group can help you navigate these options, which are much more expansive than this simple overview. Contact us to schedule a consultation.