Succession Planning: A Critical Insurance Policy
Business owners spend years building a successful business, a lot of back breaking years full of stress, struggle and probably some heart break. If you are a business owner, have you considered what it was all for? If something were to happen to you, something major and unexpected that greatly reduced your ability to work or took that ability away completely, would the company be able to carry on or would it stumble and maybe just fall apart?We purchase automobile insurance, homeowner’s insurance, health insurance, life insurance and general business insurance all in an effort to protect various assets and ourselves from unforeseen events. However, what kind of “insurance” policy is available to ensure the continuation of a business? This is where succession planning comes into play.
Many business owners are too busy with day to day business to focus on succession planning. Yet they purchase a variety of insurance policies to protect against the possibility of an unfortunate event. How is addressing the succession of a business, should an unfortunate event occur, any different?
There are several variables to be considered in developing a succession plan and the variables will be different for each business. For example, there may be multiple owners, family members involved, a key employee that has been with the business from the beginning or a business owner who may want to bring in a third party to learn the business. Whatever the variables of a particular business, any plan for succession should be known, discussed or even better written down with the details of succession identified.
One component of developing a succession plan is the buy/sell agreement. A buy/sell agreement is the road map to business continuation. It can provide an effective transfer of ownership to other owners, family members, and key employees or back to the business. A buy/sell agreement is a legally binding agreement generally between co-owners of a business. For this reason, it is important that the document is written by a qualified attorney who consults with the business owner’s accountant. The document can restrict who can buy the ownership interest of the departing owner. Other clauses commonly in buy/sell agreements are identification of events that trigger execution of the agreement and what price will be paid for the ownership interest.
An accountant or other trusted business advisor should be utilized to help work through the details. A knowledgeable business advisor will know how to create a formula to value a business that will stand the test of time. There will need to be a discussion on the details or means of ownership transfer and who should be able to acquire the ownership interest. In addition, the financing arrangements necessary to execute the plan should be clearly documented. Financing a buy/sell agreement is often done with life insurance to ensure there is cash available immediately.
Ideally the agreement wouldn’t come into play until the business owner is ready to retire. In that case, the business owner would have the flexibility to negotiate more details of the succession. For example, employee continuation, current value of tangible assets, and value of the goodwill the owner has built up, payment terms, any consulting agreements, and the list can go on and on given that the owner is able to be present for the negotiations. What happens if suddenly the business owner becomes disabled or worse, dies? Who will do the negotiating then?
The buy/sell agreement can stand in the business owner’s place and alleviate a lot of stress from that owner’s family, co-owners, employees and even customers at a time when panic could easily prevail. A well written buy/sell agreement clearly shows the path to business continuation.
Hopefully, your succession plan and buy/sell agreement will not be needed for many years. Hopefully it collects dust in your safe or desk drawer for years. Yet, it definitely has value today in peace of mind for you as the business owner, your employees and your customers. All concerned parties can take confidence in the fact that even if the worst happens tomorrow your business has the ability to continue.
Catherine Curry, CPA is a Tax Manager for the Holyoke Based Public Accounting Firm, Meyers Brothers Kalicka, P.C. Ms. Curry can be reached at (413) 322-3544 or ccurry@mbkcpa.com.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.
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