How Business Succession Planning Can Protect Business Owners

Suppose something happens to you, and you could no longer deal with your business anymore? Whom will then control your business, and will it be managed the way you want?

Establishing a sound business succession plan helps ensure that your business gets give more smoothly.

Business succession planning, also known as business continuation planning, is about planning for the extension of the business following the departure of a business owner. A evidently articulated business succession plan identifies what happens after situations including the retirement, death or disability of the proprietor. 

A good business succession programs typically include, but not restricted to:

? Goal joint, such as who will be authorized to obtain and run the business;

The company owner’s retirement planning, impairment planning and estate planning;

? Process articulation, such as whom to transfer stocks and shares to, and how to do it, and how the transferee is to fund the transfer;

? Studying if existing life insurance and investments are in destination to provide funds to facilitate ownership transfer. If perhaps no, how are the gaps to be stuffed;

? Analysing shareholder agreements; and

? Assessing the business environment and strategy, management functions and shortfalls, corporate framework.

Why exactly should business owners consider business succession planning?

? The business can be moved more smoothly as is possible road blocks have been anticipated and addressed

? Income for the business owner through coverage, e. g. ongoing income for disabled or seriously ill business owner, or source of income for family of deceased company owner

? Reduced probability of compelled liquidation of the business due to sudden fatality or long lasting disability of entrepreneur

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

Nevertheless , insurance is generally preferred since it is the most effective solution and the most affordable one compared to the other options.

Life and disability insurance to each owner ensure that some financial risk is used in an insurance company in the event that one of the owners passes on. The proceeds to be used to buy out the deceased owner’s business share.

Owners may choose their preferred ownership of the insurance policies via any of the two arrangements, “cross-purchase agreement” or “entity-purchase agreement”.

Cross-Purchase Arrangement

Within a cross-purchase contract, co-owners will buy and own a policy on each other. When an owner dies, their coverage proceeds would be paid out to the living through owners, that will use the proceeds to buy the departing owner’s business share at a recently agreed-on price.

However, this kind of agreement has their limitations. A key one is, in a business with a huge quantity of co-owners (10 or more), it is somewhat impractical for each and every owner to maintain independent policies on each other. The price tag on each policy may differ due to a huge disparity between owners’ age, resulting in inequity.