How business succession planning can protect business owners
What if something happens to you, and you can no longer manage your business again? Who will take over your business, and will it be managed as you want?
Building a good business succession plan helps ensure that your business is delivered more smoothly.
Business succession planning, also known as business continuation planning, is about planning for business continuation after the departure of business owners. A clear business succession plan articulated determines what happens to events such as retirement, death or defect of the owner.
Good business succession plans are usually included, but are not limited to:
· Articulation of goals, like who will authorize to own and run a business;
Retirement planning business owners, defective planning and real planning;
· Articulation of the process, like who to transfer shares to, and how to do it, and how to transfere to fund transfers;
· Analyze whether existing life insurance and investment are available to provide funds to facilitate ownership transfers. If not, how the gap is filled;
· Analyze the shareholder agreement; and
· Assessing environmental and business strategies, management capabilities and shortcomings, company structures.
Why should business owners consider planning business succession?
· Business can be transferred more smoothly as a barrier that might be anticipated and handled
· Income for business owners through insurance policies, eg. Sustainable income for disabled or critical ill business owners, or income sources for families of a died business owner
· Reducing the probability of forced liquidation of business due to sudden death or permanent disability business owners
For certain components of a good business succession plan to work, funds are needed. Some common ways to fund succession plans include investment, internal reserves and bank loans.
However, insurance is generally preferred because it is the most effective and cheapest solution compared to other options.
Life and disability insurance in each owner ensures that some financial risks are transferred to insurance companies if one owner passes. Results will be used to buy business share owners who have died.
Owners can choose ownership of their selection for insurance policies through one of two settings, “cross purchase agreements” or “entity purchase agreements”.
In a cross purchase agreement, the joint owner will buy and have a policy of each other. When a death owner, the results of their policies will be paid to living owners, who will use the results to buy business share owners who depart at the price agreed before.
However, this type of agreement has limitations. One key is, in business with a large number of shared owners (10 or more), somewhat impractical for every owner to maintain separate policies with each other. The cost of each policy may be different because of the large disparity between the age of the owner, which results in injustice.
In this case, the entity purchase agreement is often preferred.
Entity purchase agreement
In the entity purchase agreement, the business itself buys a single policy on each owner, becoming a policy owner and recipient. When an owner dies, business will use the policy results to buy the business share of the late owner. All costs absorbed by business and equity are maintained among shared owners.
What happens without business succession plans?
Your business may suffer large consequences without the right business succession plan if there is an unexpected death or permanent disability.
Without a business succession plan, this scenario might occur.