We all know that successful entrepreneurs are highly motivated people, prized as job creators in our communities and respected for their drive, hard work, and practical know-how. Among the many rewards of being a successful business owner – along with all the responsibilities — is the ability to provide a desirable life-style for family, including educational, social and financial opportunities for children that might not be possible without the resources the business provides. In other words, success in business presents an opportunity to leave a legacy. It seems surprising at first glance, then, that practical and successful business owners often find themselves at a critical juncture in their lives and business careers with no plan in place to preserve the financial engine of that legacy, the business itself. Not only is the legacy imperiled by lack of professional planning, but so might any future business income that may be counted on by the owner during his or her retirement years.
Unfortunately, instead of having a well-thought-out plan to keep the business viable despite the impact of predictable life events such as retirement or passing away, or even unpredictable ones, such as incurring a disability, some owners find themselves trying to patch together a plan at the wrong time – when they are under pressure to do so. Up until that time, the business owner – and perhaps his or her partner(s) — may be engaged in “fantasy planning.” In other words, they have an idea about the future of the business, but yet have nothing appropriate on paper. Real succession planning needs to be robust. It requires candid discussions with partners, senior employees and family members, as well as implementation assistance from financial and legal professionals. There may be some costs involved, but any cost is likely to be minimal relative to the stakes that are involved. Effective succession planning means the business goes on after you leave it, and that you and your family can benefit financially from it because it continues to be profitable and well managed.
Deciding on someone to succeed you can entail discussions with a partner or partners, with senior employees, with family members, or with someone else you may select. It is important to be as objective as possible about the qualifications of a successor, even if it is a family member. Remember that you and other family members, as well as employees and customers, will benefit most from having competent management at the helm of the business when you’re no longer there.
As part of a business succession plan, you may want to consider a buy-sell agreement as an integral part of your overall strategy. A buy-sell agreement is a legal document that defines the rights of buyers and sellers with regard to interests in a business. Most importantly it does the following:
• Identifies in writing who will succeed you and thus sets up a smooth transition of ownership.
• Determines when a buyout will be triggered. You get to determine the appropriate triggering events to incorporate into your buy-sell agreement. Besides the death or disability of an owner, you might consider a divorce, or a bankruptcy, or the termination of employment or retirement as triggers that put the agreement into effect.
• Finally, it’s important for the buy-sell agreement to set forth a method of valuing the business. The method chosen (dollar amount or formula) for valuation should reflect the input of professional legal and tax advisors
How will it be funded?
It’s great to have the outlines in place for a successor to eventually run the business, but how about the critical issue of funding the buy-sell agreement before it kicks in? The individual you choose to run your company, be it a senior employee, partner, or family member, may not have the cash or the ability, to borrow at the time required by the agreement. A life insurance policy can be a straightforward solution. The death proceeds of the policy can be paid to your successor upon your death and the funds can then be used to purchase the business from your heirs. Or, the cash value of the policy can be used as a down payment to purchase the business at your retirement.
In addition, it may be prudent to explore how your unexpected disability could affect not only your plans for a successor, but also your own or your family’s financial well-being. A disability buyout policy can provide a successor with cash to purchase the company from you upon your disability.
As a business owner, you’ve worked diligently over the years to ensure your company’s success. Navigating all the hazards of the economy and your particular market is no easy task. It would be a shame if a lack of professional succession planning caused the business to flounder or fail and thus undo your prior achievements as well as your hoped-for legacy. With proper planning and professional help, this trap can be avoided — and you can leave the legacy you desire.
For more information on the financial, risk and wealth management strategies that Wayne Kuykendall provides, please contact him/her at insert company-approved phone number, email, website, and/or physical address as desired.
Prepared by MetLife
Delivered courtesy of Wayne Kuykendall, Financial Services Representative
Strategic Financial Partners, an office of MetLife