How business succession planning can protect business owners

What if something happens to you and you can no longer run your business? Who will take over your business and run it the way you want it to?

Establishing a strong business succession plan helps ensure that your business is delivered smoothly.

Business succession planning, also known as business continuation planning, involves planning for the continuation of the business after the departure of the business owner. A clearly articulated business succession plan specifies what happens in events such as the owner’s retirement, death, or disability.

A good business succession plan generally includes, but is not limited to:

Articulation of objectives, such as who will be authorized to own and manage the business;

Business owner retirement planning, disability planning, and estate planning;

Articulation of the process, such as to whom and how to transfer shares, and how the transferee will finance the transfer;

Analyze if there are existing life insurance and investments to provide funds to facilitate the transfer of ownership. If not, how will the gaps be filled?

·Analysis of shareholder agreements; Y

Assessment of the business environment and strategy, management capabilities and deficiencies, corporate structure.

Why should entrepreneurs consider business succession planning?

The business can be transferred smoothly as potential obstacles have been anticipated and addressed

Income for the business owner through insurance policies, for example, continuing income for the disabled or seriously ill business owner, or source of income for the family of the deceased business owner

Reduction of the probability of forced liquidation of the business due to sudden death or permanent disability of the business owner

For certain components of a good business succession plan to work, financing is required. Some common ways to finance an estate plan include investments, internal reserves, and bank loans.

However, insurance is generally preferred as it is the most effective and least expensive solution compared to the other options.

Each owner’s life and disability insurance ensures that part of the financial risk is transferred to an insurance company in the event of the death of one of the owners. Proceeds will be used to purchase the deceased owner’s business interest.

Homeowners can choose their preferred property insurance policies through either “cross purchase agreement” or “entity purchase agreement.”

Cross purchase agreement

In a cross-purchase agreement, the co-owners will buy and own a policy with each other. When an owner dies, the proceeds from their policy will be paid to the surviving owners, who will use the proceeds to purchase the outgoing owner’s business interest at a pre-agreed price.

However, this type of agreement has its limitations. One key is that, in a business with a large number of co-owners (10 or more), it is impractical for each owner to maintain separate policies from one another. The cost of each policy can differ due to a great disparity between the age of the owners, which creates inequity.

In this case, an entity purchase agreement is often preferred.

Entity Purchase Agreement

In an entity purchase agreement, the company itself purchases a single policy for each owner, becoming both the owner and the beneficiary of the policy. When an owner dies, the company will use the policy proceeds to buy out the deceased owner’s business interest. All costs are absorbed by the business and the equity is held between the co-owners.

What happens without a business succession plan?

Your company can suffer serious consequences without a proper business succession plan in the event of unexpected death or permanent disability.

Without a business succession plan, these scenarios could occur.

If the business is shared between the business owners, then the remaining owners can fight over the shares of the leaving business owner or the percentage of the business.

There could also be a potential dispute between the sellers and buyers of the business. For example, the buyer may insist on a lower price against the seller’s higher price.

In the event of permanent disability or critical illness of the business owner, business operations could be affected as they may not be able to work. This could also affect customers’ faith, income and morale in the company.

The income stream for the owner’s family will be interrupted if the business owner, being the sole breadwinner for the family, dies unexpectedly.

Don’t let the whole business you’ve built come crashing down the minute you’re not there. Planning ahead with a proper business succession plan before an unexpected or premature event occurs can help secure your business legacy, ensuring that you and your future family members are well cared for.