Consider these Key Factors to Develop a Sound Business Succession Plan
Monday, November 15th, 2021
What will happen to your company when you retire? Business Succession is something that many business owners don’t consider until it is too late, making selling the company the only viable option. If you want to preserve the legacy of your company or if you have other invested parties to consider, a business succession plan is not just smart but imperative. In essence, a sound business succession plan will include how you intend to oversee, sell, or transfer the company if you retire or in the event of your death.
Consider the following key factors to develop your sound business succession plan:
Why?
Don’t ignore it; retirement and death happen. Have a solid business succession plan in place to prevent prevailing issues and problems from rearing their head after you’re gone- which could cause the unfortunate demise of a company that you worked to protect. If you are an investor or partner in a company, make sure that you are well aware of the succession plan.
Who?
You will need to elect a successor for your company; in many instances, this involves passing the reigns to a family member or associate, but there could be many individuals that are vying for ownership of your business. Consider the pros, cons, strengths, and weaknesses of all candidates and prepare for opposition or hostility from those that were not chosen to replace you. Choose the best person for the job; you can’t please everyone all the time. Those invested in your company who do not care for the choice may opt to sell their stakes in the company to other partners or associates if they wish. This is not an uncommon repercussion at a time of succession or transition.
What?
It will behoove you and whoever takes over your role to determine the actual value of our business. Usually, this requires an appraisal from a CPA (certified public accountant) or from arbitration among all partners and owners. If your company is publicly traded, the value will be determined based on the current stock market value.
How?
After you know what your company is worth, partners and owners in the business should take out life insurance policies that benefit the others in the event of a death. The benefit is then used to buy out the investor who has died, and their share is distributed among the surviving owners or partners.
How this occurs is typically one of two ways:
An entity-purchase arrangement is fairly simple and provides for a single policy on each owner or partner of a business, and upon death, the business uses the benefit to purchase the deceased person’s share.
A cross-purchase arrangement is a bit more complicated. In these instances, each owner or partner buys an insurance policy on each of the other owners of the business. When one partner dies, the benefits of each surviving investor are pooled to purchase the share of the business previously owned by the deceased.
Got your business succession plan prepared? For the smoothest transition and equitable arrangement for your company, seek out the expertise of a qualified and competent financial advisor for support. Talk to the experts at BMH Accounting to ensure you are covered and your company is protected in a wide range of scenarios; call to learn more today.
Tags: company legacy, company value, cpa, cross-purchase arrangement, entity-purchase arrangement, oversee your company, retirement planning, sell your company, Sound Business Succession Plan, transfer your business