How business succession planning can protect business owners
October 26, 2021
What happens if you are unable to manage your business?Who will take over your business and how will it be managed?
A solid business succession plan will help ensure your business is transferred more easily.
Business continuation planning is also known as business succession planning. It’s about planning for the continuation and continuation of the business following the death or disability of an owner.A business succession plan clearly outlines what happens in the event of death, retirement, or disability.
Good business succession plans often include, but are not limited to:
*Goal articulation: Who will be allowed to own and manage the business?
Business owner’s estate, retirement and disability planning.
*Process articulation: Who to transfer shares to and how to do so, as well as how the transferee will fund it.
*Selecting whether existing investments and life insurance are available to fund ownership transfer.What are the gaps?
*Analyzing shareholder agreements
* Assessing the business environment, strategy, management abilities and shortfalls, and corporate structure.
What are the reasons business owners should plan for business succession?
*The transfer of the business will go more smoothly if all obstacles are anticipated and dealt with.
*Income for business owners through insurance policies, e.g.*Income for the business owner through insurance policies, e.g.
*Reduced chance of forced liquidation due to sudden death of permanent disability
Funding is necessary for certain elements of a business succession plan to be successful.There are several ways to fund a succession plan, including bank loans, investments and internal reserves.
Insurance is preferred because it is the best and most cost-effective option.
In the event of death, each owner has life and disability insurance.The proceeds will be used for the purchase of the business shares of the deceased owner.
Owners can choose to own their insurance policies through either a cross-purchase agreement or an entity-purchase agreement.
Cross-purchase agreements allow co-owners to purchase and own policies on one another.The policy proceeds of an owner who dies would be paid to their surviving owners. They will then use the proceeds to purchase the business share of the departing owner at a price previously agreed to.
This type of agreement does have its limitations.One of the key issues is that it can be difficult for co-owners to have separate policies.Due to the large age disparity among owners, each policy’s cost may be different. This can lead to inequity.
An entity-purchase agreement is preferred in this situation.
Entity Purchase Agreement
An entity-purchase agreement allows the business to purchase a single policy for each owner. The owner becomes the beneficiary and the owner of the policy.The business can use policy proceeds to purchase the deceased owner’s share of the business when an owner passes away.The business absorbs all costs and shares equity with the co-owners.