Why start succession planning when business is good – Orange County Register

When I meet with business owners and ask the question, “When do you plan to leave your company?” The answer is always the same: “I’ll retire in five years.”

The deadline is just far enough away that committing and planning today seems unnecessary. But it’s close enough to feel achievable and realistic.

Succession planning is critical to the continued success of a business. Sometimes life doesn’t happen the way we hope it will. Divorce, death, illness, disability, or separation from a business partner can put undue pressure on a company and cause harm from which it may never recover. A succession plan allows for an orderly transition when the owners are ready to sell – or are forced to sell due to an unforeseen event.

Succession plans should be implemented when business owners are relatively satisfied that the business is running smoothly. When planning begins because of a problem you’ve encountered, the outcome may not be nearly what you expected.

Depending on the size of your business, planning an exit strategy may require a team of experts to coordinate and execute a successful plan. At some point during the process, you may need to meet with your corporate attorney, accountant, estate planning attorney, business valuation expert, broker, and financial advisor.

Four common exit strategies to consider are:

1. Sell the business to your business partner(s).

If a business partner dies without planning, their share in the business usually passes to their spouse. This may not be ideal for the surviving business partner or spouse of the deceased.

To avoid this scenario, a purchase-sale contract is usually concluded between the business partners and financed with life insurance. Properly drafted, this arrangement can ensure that beneficiaries of the deceased owner’s estate do not inadvertently become entrepreneurs. The insurance policy may be purchased in an irrevocable life insurance trust that provides tax-advantaged liquidity on the death of the insured.

Two types of purchase and sale contract used for two or more owners are the following: a cross-purchase contract and an entity-purchase contract.

A cross-purchase-sell agreement is a contract between business owners in which all owners agree to purchase another owner’s business interests upon the occurrence of a specific event, typically death. This type of sale-purchase agreement works well for businesses with two or three owners who are all the same age. Every business owner undertakes to take out life insurance on the lives of the other owners. The total coverage of each policy should equal the total purchase price for that owner’s share of the business.

The second option, a purchase and sale agreement to purchase a business, is more appropriate when there are more than three business owners or when the owners are of widely different ages. With a business purchase agreement, the business entity agrees to purchase a deceased owner’s shares from the deceased owner’s estate at a predetermined price. The amount of coverage should be equal to the purchase price of that owner’s business share.

2. Sell the business to an outside party

For most sellers, a business broker can help find a buyer and assist in creating an exit strategy. Owners should look for an agent who specializes in selling businesses similar to their own, in the same geographic market, and in the same price range. Ask for references and do your due diligence before proceeding. Research the broker’s strengths and weaknesses, and then consider how those qualities might align with your goals and expectations.

The International Business Brokers Association (IBBA) is the largest not-for-profit association serving solely for individuals and companies involved in business brokerage and mergers and acquisitions. Their website, ibba.org, includes a tool to help sellers identify IBBA agents in their area.

3. Transfer the business to your heirs

Transferring a business to a family member requires careful planning. There will be sensitive issues that need to be discussed based on your family dynamics.

Is there a family member interested in running the business who is also qualified to run the business? Will transferring your business interests to this family member exacerbate unresolved family issues? How will this person buy out the original owner?

Working with an executive coach who specializes in preparing businesses that will be passed on to heirs can be helpful.

4. Sell the company to a key employee

If selling your business to a loyal employee is your exit strategy, discuss your plans with key employees well before your retirement date. Mentor that person and train them to learn the nuances you discovered in your leadership role.

Agree in advance how they will pay for the deal. Do you need to position the company to qualify for a loan? Are you ready to finance the transfer of ownership with an installment sale?


Leave a Reply

Your email address will not be published. Required fields are marked *