Keeping the Dream Alive-Business Succession Planning
Jerry runs Regal
Printing, a successful print shop (C-corporation), that he started 25 years ago. He has
two employees, but he and his wife are sole owners, with all management and
decision-making responsibility.
Jerry and his wife, Elizabeth, pooled their savings to get the business off the ground and
have spent their lives nurturing it. It is by far their largest asset. Their oldest
daughter is very active in the company, but their other two children are too young. Will
any of their three children run Regal Printing some day? Or perhaps one of their key
people? That depends.
The Small Business Administration estimates that only 30% of family businesses pass
successfully to the second generation. Business succession planning can be difficult for
your clients, especially with all the day-to-day problems that need immediate attention.
But, lack of planning can be devastating. Most likely the 30 percent of businesses that do
make it, make it because their owner planned for the orderly transfer of the enterprise.
Jerry and Elizabeth's situation is common. A family business is often the owner's major
asset. The death or disability of a business owner --who is usually the key to the success
of a business-- can seriously damage the business' value. Good planning can substantially
minimize these risks. Let's take a look at why some owners plan for succession while
others do not, the methods and tools to transfer business interests, and how to begin
developing a plan.
"Business succession" planning
simply means planning for the transfer of business ownership and management from the
current owner to someone else. There are a number of good reasons why owners should plan
for the transfer of their businesses, such as avoiding the business passing to
underqualified owners, protecting key employees, or raising cash. However, most of the
time the planning is done simply to "keep the dream alive"-- to make sure the
business extends beyond the owner's lifetime. Few business owners work for a lifetime only
to consciously decide to let their businesses dissolve when they're no longer able to
manage it.
Every business owner should consider having a buy-sell agreement to assure the
continuation of the business and to protect the owner and his or her family. However,
owners frequently don't know what they want to do, nor the various options open to them.
Buy-sell agreements work no matter what form a business takes: sole proprietorship,
partnership, or corporation.
Beyond taking that all-important first step and getting the agreement set up, having the
dollars available to make the transfer happen is also key. Generally, the most convenient
and least expensive method of funding the buy-sell agreement is through life insurance.
Buy-sell agreements funded with life insurance offer these benefits:
 | Help establish a value for the business. |
| Provide liquidity to support the family. |
| Prevent family involvement when the owner wants control to transfer to business associates. |
Clearly, a buy-sell agreement best
protects owners and families if arrangements are made prior to their death or disability.
And, funding the buy-sell agreement so the dollars are there when they're needed is
essential. There are a myriad of disability and life insurance solutions to this problem.
One of the best life insurance solutions, especially in a family business situation, is a
second-to-die or survivorship life policy.
A survivorship life insurance policy is a policy which covers two lives, in contrast to a
traditional policy which covers only one life. A survivorship policy generally costs less
than purchasing multiple, single life policies because the risk is spread over two lives.
The policy's death benefit is paid at the second death.
It's never too early to plan for the succession of your business. To get started, ask
yourself some general questions:
| Why do you want to plan for succession, and what do you want to accomplish? |
| When and how do you want to transfer your business? |
| Who are possible candidates to own your business? |
| What do you consider an acceptable value for your business? |
| What problems could arise in the succession process? |
| Who is available to help you? |
First and foremost, assess your business succession situation carefully so your plan accomplishes your goals. A buy-sell agreement and survivorship life insurance may offer some answers to keep the dream alive!
