Simply put, succession is the natural transition of property. Business succession is the process of choosing someone to take over your business, and developing a plan to make it work. Several questions come to mind when thinking through business succession. While lots of business owners overlook business succession planning until the last moment, it is a critical part of ensuring the future success of the company. If you have a partner, what do you want to happen if one of you dies? What if one of you becomes disabled? What if one of you want to sell to another party? How do you want to handle a dispute over the management of the business? Do you want to keep certain key employees? What about your retirement and your long-term care needs? The point is there are a lot of scenarios that can occur over the life of a business. Even in the best of times, cash flow can be tough to manage and consume a lot of time.
I usually tell my clients there two ways a small or closely-held business is run. One way is where the owners live inside the business and the other way is where the owners build the business to sell. The first way allows the owner to extract maximum value from the business to benefit the owner’s personal life. The second way, allows for the business to be easily valued so that the owner may extract maximum value when it comes time to sell. And reality usually falls somewhere in between.
It is not hard to imagine if one or more of the business owners dies or is in a serious accident it may be tough to keep the business up and running and be protected from large, unexpected liabilities. Regardless of your desire, if you do not plan, the state will have a plan for your estate which will impact your business.
Why A Business Succession Plan?
Unlike an estate plan, there are no clean legally prescribed means for business succession. And all too often with small business, when an owner is unexpectedly disabled, has a stroke, heart attack, or dies, the business is trapped within the estate. The reality is we all exit this world the same way and a business succession plan can help:
- Prepare the business to handle unexpected events
- Transfer ownership
- Maintain a certain lifestyle in retirement
- Provide for the financial needs of heirs
Ask yourself, can the business survive your departure? Do you know what your business is worth? Several tools are available to assist in the succession planning. One tool is the use of a buy-sell agreement. This is an arrangement between owners or owners and key personnel where the surviving owners agree to purchase the interest of the withdrawing or deceased owner. Business owners should consider the tax implications when drafting and funding their buy-sell agreements. The death of an owner may trigger certain taxes to be paid upon the transfer of the business and associated assets. For that reason, the personal finances of individual owners may dictate the most effective approaches for minimizing potential income and estate tax liabilities.
How Can I Fund A Business Succession Plan?
Below is a checklist of possible funding alternatives such as:
- All cash on closing
- Part payment on signing and balance on closing
- Deposit held in escrow until closing
- Installment payments
- Mortgage or other collateral security
- Insurance Proceeds
- Personal guaranty of payment by buyer
Business Succession Planning: The Earlier The Better
Steven Covey, author of the book 7 Habits of Highly Effective People, emphasized the importance of beginning with the end in mind., which is something I always remind clients. I am suggesting, we plan for success by anticipating risks that lead to failure. The reality is everyday businesses shut down, people lose their jobs, get divorced, and die. Success and failure are two sides of the same coin. A business succession plan is a mature way to address organizational risk. So, if your business is going to succeed, it makes sense to have back up plans if certain things happen. The earlier the better!
For more information on Estate Planning And Business In Oklahoma, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (918) 565-0070 today.