Business owners who are nearing retirement must think about forming a succession plan. Choosing a successor is not an easy process. There are many different factors to think about, and some owners may find that it is best to simply sell the entire business. However, choosing a good successor can be even more profitable, so it is worth considering.
Choosing A Successor Maintaining a good cash flow and keeping a stable balance sheet are two main goals all business owners have. Both can be an ongoing battle. Choosing a successor who is capable of keeping an optimal cash flow can be challenging. In some cases, business owners may simply be able to appoint a family member. However, those who do not have family members, or those who do not have family members interested in keeping a business, have the biggest challenges. It is best to devise a list of candidates. Identify each individual’s strengths and weaknesses. Another factor to consider is how important the business may be to the successor. Many family members feel that a business upholds the family name, so they may be less likely to sell it. However, a successor outside of the family may not feel the same way.
Determining The Business’ Worth Certified public accountants can perform an appraisal on a business or a share of a business. This puts a realistic dollar value on its worth. If a company’s value depends on public stock, the value of the owner’s interest is calculated using the current stock market values. As soon as a value is established, life insurance should be purchased by the business owner or all partners. If one partner dies, that individual’s life insurance benefit can be used to buy out his or her share of the business. It can also be equally divided among the surviving partners. These arrangements may be known as entity-purchase agreements or cross-purchase agreements. The term used is determined by the specific situation’s details.
Ways To Transfer A Business Cross-purchase agreements allow each partner to own a policy for every other business partner. Each partner is both a beneficiary and an owner for the same policy. By paying the benefit to all partners in equal sums, there are no quarrels over unfair percentages. However, there are limits for this type of agreement’s practicality. If there are more than 10 partners in a business, it does not make sense for each partner to have a policy for all of the others. In addition to this, there may be significant differences in underwriting requirements and terms for each partner’s policy. For example, if one partner is 30 years old and one is 60 years of age, their policies and costs would be different. In situations such as this, entity-purchase agreements are often used. Entity-purchase agreements are not as complicated. The business itself is the beneficiary, and there are separate policies for each partner. With this type of agreement, the partners’ equity is underwritten, and the business consumes all of the costs. If a partner dies, the benefit is paid solely to the business itself.
Having a business succession plan is a good idea. Creating one may seem like a hassle, but it is time well spent. Devising a succession plan ensures that an agreeable price is set for each partner’s share of the business. It also reduces the need for valuation after death because of pre-agreed prices. A succession plan can also help with prompt settlement of a deceased partner’s estate. Benefits are available immediately after death, and there are no time restraints or liquidity issues to deal with. This eliminates the possibility of having to sell the business or facing external takeover due to financial issues. These plans require solid preparation. It is important to seek the advice of a competent adviser. For more information about creating succession plans, contact ACBI.