How Business Succession Preparing Can Protect Business Owners

What if something happens to you, and you may no more manage your business any longer? Who will then dominate your business, and can it be managed how you want?

How Business Succession Preparing Can Protect Business Owners

Establishing a audio business succession strategy helps to ensure that your business gets paid more smoothly.

Business succession preparing, also called business continuation preparing, is about planning the continuation of the business enterprise following the departure of a business proprietor. A obviously articulated business succession strategy specifies what goes on upon events like the retirement, loss of life or disability of the dog owner.

An excellent business succession plans typically include, however, not limited to:

·Objective articulation, such as who'll be authorized to possess and operate the business;

The business enterprise owner's retirement planning, disability planning and estate planning;

·Procedure articulation, such as whom to transfer shares to, and how to do it, and how the transferee is to fund the transfer;

·Analysing if existing life insurance and investments are in place to provide funds to facilitate ownership transfer. If no, how are the gaps to be filled;

·Analysing shareholder agreements; and

·Assessing the business environment and strategy, management capabilities and shortfalls, corporate structure.

Why should business owners consider business succession planning?

·The business can be transferred more smoothly as possible obstacles have been anticipated and addressed

·Income for the business owner through insurance policies, e.g. ongoing income for disabled or critically ill business owner, or income source for family of deceased business owner

·Reduced probability of forced liquidation of the business due to sudden death or permanent disability of business owner

For certain components of a good business succession plan to work, funding is required. Some common ways of funding a succession plan include investments, internal reserves and bank loans.

However, insurance is generally preferred as it is the most effective solution and the least expensive one compared to the other options.

Life and disability insurance on each owner ensure that some financial risk is transferred to an insurance company in the event that one of the owners passes on. The proceeds will be used to buy out the deceased owner's business share.

Owners may choose their preferred ownership of the insurance policies via any of the two arrangements, "cross-purchase agreement" or "entity-purchase agreement".

Cross-Purchase Agreement

In a cross-purchase agreement, co-owners will buy and own a policy on each other. When an owner dies, their policy proceeds would be paid out to the surviving owners, who will use the proceeds to buy the departing owner's business share at a previously agreed-on price.

However, this type of agreement has its limitations. A key one is usually, in a business with a large number of co-owners (10 or more), it is somewhat impractical for each owner to maintain separate policies on each other. The cost of each policy may differ due to a huge disparity between owners' age, resulting in inequity.

In this instance, an entity-purchase agreement is often preferred.

Entity-Purchase Agreement

In an entity-purchase agreement, the business itself purchases a single policy on each owner, becoming both the policy owner and beneficiary. When an owner dies, the business will use the policy proceeds to buy the deceased owner's business share. All costs are absorbed by the business and equity is maintained among the co-owners.

What Happens Without a Business Succession Plan?

Your business may suffer grave consequences without a proper business succession plan in the event of an unexpected death or a permanent disability.

Without a business succession program in place, these situations might happen.

If the business enterprise is shared among companies, then your remaining owners may combat over the shares of the departing business proprietor or higher the percentage of the business enterprise.

There could also be considered a potential dispute between your sellers and customers of the business enterprise. For electronic.g., the customer may insist on a lesser cost against the seller's higher cost.

In case of the permanent disability or critical illness of the business enterprise owner, the functions of the business could be affected because they might not really be in a position to work. This may affect clients' faith, income and morale in the business as well.

The blast of income to the owner's family will be take off if the business enterprise owner, being the only real breadwinner of the family, unexpectedly dies.

Don't let all of the business you possess developed collapse the minute you aren't there. Preparing in advance with a proper business succession plan before an unexpected or premature event happens can help secure your business legacy, ensuring that you and your family's future will be well taken care of.