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?

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

Business succession planning, also known as business continuation planning, is 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;

Retirement planning, disability planning, and estate planning for the business owner;

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

Analyze whether 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 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 seriously ill or disabled business owner, or source of income for the family of the deceased business owner

Reducing 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.

Life and disability insurance for each owner ensures that some of the financial risk is transferred to an insurance company in the event that one of the owners dies. The proceeds will be used to purchase the deceased owner’s business interest.

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

Cross Purchase Agreement

In a cross-purchase agreement, co-owners will purchase and own a policy between themselves. When an owner dies, proceeds from his or her policy would be paid to the surviving owners, who would use the proceeds to buy out the departing owner’s business interest at an agreed-upon 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 large disparity between the ages 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 buys a single policy for each owner, becoming both the owner and beneficiary of the policy. When an owner dies, the company will use the proceeds from the policy to purchase the deceased owner’s business interest. All costs are absorbed by the business and equity remains between the co-owners.

What happens without a business succession plan?

Your company can suffer serious consequences without an adequate 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 may fight over the leaving business owner’s shares or 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 the faith, income and morale of customers in the company.

The stream of income for the owner’s family will be interrupted if the business owner, being the sole breadwinner in 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 untimely event occurs can help secure the legacy of your business, ensuring that you and your family’s future are well taken care of.

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