Isn’t it interesting that success is built into business succession. Still, the majority of US companies do not have a business succession plan in place. What is business succession planning and how does it enhance your own success and that of your business?
The Important Questions at the Heart of Business Succession Planning
If you own controlling interest in a single business or several companies there are many important questions about the ownership and control of your business interests that should be carefully considered and answered now, in the event something were to happen down the road.
What is business succession planning and why is it important to undertake this process? What happens to the company if you become incapacitated for any reason? What do you ultimately intend to happen to your business after you retire? What is the impact on your business interests if you pass away or lose your life in an accident? Do you wish for your company to continue after you’re gone? Will the company and your spouse or heirs have the resources to protect and preserve the value of your interests?
A strong succession plan incorporates legal entities, trust and estate planning and essential insurance to preserve the operations of your company if something were to happen to you. The plan should establish a process to ensure the reins of power are passed quickly and cost-effectively without triggering unnecessary tax implications. This is how success is built into business succession.
What Happens to Your Business Interests if Something Happens to You?
Most people don’t want to consider the possibility of a life event that would interrupt or end their lives. Yet, most people also understand the value and importance of taking the time and making the investment to undertake trust and estate planning, or at least prepare a will in order to protect their assets and wishes and provide for those they cherish.
How important is your company or business interests? How hard have you worked to get to this point in your life? How much money and time have you invested?
Business succession planning should establish a process to keep the company running if something were to happen to you. Is it your intention for the company or your business interests to be sold or for operations to continue? Is there a spouse, an heir, beneficiary or specific person you believe should be in control of your interests if something were to happen to you?
Effective business succession planning prevents cash flow crises and ensures the company has the resources and management needed to protect the value of your holdings and/or maintain operations.
Can someone be hired from outside of the organization to come in and run the company for a short period of time until it is sold? What resources would be required to maintain operations or preserve the value of the business?
Have you prepared an individual or group of people to step in and run the company or manage your interests in your absence? Are there current employees who have the right skill set to help with management? Have you identified potential talent within the company that could develop the knowledge and skills required for leadership in the future?
If there are multiple owners within the company, then it is important to ensure the loss of one of the partners doesn’t cripple the company. Life insurance is often employed as part of business succession planning to provide liquidity and additional options upon the passing of one of the partners.
You may choose to deploy a “cross-purchase” agreement which establishes the value of each ownership share in advance. The “partners” or owners in the business take out insurance policies on each other where the “owner” of the policy and the “beneficiary” of the policy is the same (individual or group). The proceeds of the policy are used to buy out the interest of a partner who dies or becomes incapacitated. This protects the families and beneficiaries of each individual owner while preserving the viability of the business itself.
Business succession planning is often accomplished through the use of a revocable trust which holds your ownership interest(s) and contains your specific instructions for the transition of power and the circumstances when it is to occur. Insurance can provide needed liquidity and the resources with which to manage any process or transition.
Succession planning is a corporate governance and estate planning strategy to ensure your business continues to operate successfully or maintain its value if something were to happen to you. It establishes a plan to ensure there are appropriate resources and/or qualified personnel to protect the company you have worked so hard to build if you become incapacitated or upon your passing.
These are many of the issues that must be addressed to ensure success is built into business succession. Learn more about business succession planning and estate planning as well as the tax implications of each available option. We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.