Every business owner knows that building a business takes dedication, commitment, hard work, sacrifice, sweat equity, and yes, a little luck.
There is nothing quite like the sense of pride and accomplishment that comes from owning a successful business, whether it is a partnership or a family-owned one. To maintain the fruits of your labor, you should take the time to establish a plan to ensure the continued success of your business.
A succession plan addresses potential contingencies. The most common “what-ifs” are addressed, such as the death, disability, or retirement of an owner or key executive, or the eventual sale of an owner’s equity interest.
In any partnership, whether the business is a Limited Liability Company, Limited Partnership, General Partnership, or Corporation, the succession plan usually includes a buy-sell agreement. This is a legally binding and comprehensive document that considers all legal and tax-related issues with directives in place to execute the pre-determined strategy.
A family-owned business presents additional challenges. The historical success rate for the transition of family-owned businesses has been quite low. This is in part due to the unique “people” problems that can occur, as changes in management evoke emotions when they involve family members. Transitioning a family business to the next generation should not be a “rite of passage”. Making tough decisions is critical to achieving the goal of long-term sustainability. Objectivity is fundamental.
Protecting your financial investment in the business from loss due to disability or death is paramount. Consider purchasing “key man” insurance that protects the business in case of the death or disability of a key employee. It can provide funds to the business at a crucial time and allow the company to recruit and train a capable replacement without financial cash flow hardship.
To create an optimal succession plan, it will be necessary to bring together a team of professionals that includes a business attorney, a tax attorney or CPA, a life and disability insurance broker, and a business appraiser. Because business owners tend to invest their personal assets, an estate planning attorney should also be consulted.
417 Business & Elder Law is here to assist you in developing the business succession plan that will provide for the continued success of your company, regardless of future events.
This article was also published in the printed version of the Volume 16 Sep 2019 Newsletter (PDF).
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