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Jun 19 / Posted by Scott Gosnell

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Business Succession Planning

As a business owner, you invest a great deal of time, money, sweat, worry and care into your business.  You nurture it through the hard times, expand when times are good, and try your level best to build it into something to be proud of.  Good for you!  But . . . what is going to happen to your business if you get injured and are unable to work?  Or (thinking much more positively), what happens to the business when you want to retire?  Do you have a plan — what we call a business succession plan?  Who will “inherit” the business?  Under what terms?  If you don’t have a business succession plan in place, you may find yourself wanting to retire, with a business worth a great deal of money, but no way to realize on that value.

There are a multitude of variables that go into business succession planning.  Is there a market for your business?  Who would want to buy it?  Is it a family business, which will be passed down to your children or other family members?  Are there current employees who would want to take over when “the boss” retires?  Are there competitors who would jump at the chance to buy you out at a premium?  Who is eligible to own the business (in the case of certain professional business, such as medical practices, law firms, veterinary practices, etc., the law provides that only a licensed practitioner may own the business)?

Once you have identified your successors (or potential successors), what are the terms on which they will acquire the company?  There are a myriad of buy-out options.  Will it be a cash transaction, with the entire purchase price paid up front?  If so, where will that money come from?  Insurance policies are frequently a good vehicle for providing buy-0ut cash down the road, but the policies have to be put in place early, and in the right amounts.  You should also review the policies to determine of they are still adequate; presumably your business will increase in value, which means the insurance policies might have to increase as well to cover the fair market value of the company at the time of purchase.

Instead of a one-time lump sum purchase price, an owner could be bought out over time, perhaps with a small lump sum at the time of sale, with some amount of additional cash paid out over time.  Again, the terms are limited by your imagination.  Payouts could be monthly, quarterly, or annual.  They could be fixed amounts, or based on a percentage of income (gross or net?), or otherwise.

There are dozens of other considerations when contemplating business succession, including tax planning, legal issues, and lifestyle preferences.  All of the terms should, of course, be memorialized in a business succession agreement, drafted by a business attorney who knows this area of the law.  In addition to your business attorney, it is important that you also involve your accountant and your insurance agent in the succession planning process.

Having a business succession plan offers a tremendous amount of peace of mind, giving you confidence that when you are ready to retire or, heaven forbid, if you are killed or disabled, your business will transition smoothly to new owners, and the monetary value of all of your hard work will be available to care for you and your family long after you quit working.

#businesssuccession

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Categories: Business, Succession

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