Every business should have a succession plan that details what happens when the owners and key employees become disabled, retire or pass away.
Business succession planning simply means to plan for the smooth continuation of a business after the disability, death or resignation of its business owners.
Business succession planning key to keeping the business operational after an owner becomes disabled, retires or passes away and is a vital part of estate planning!
What is “Business Succession Planning”?
For most businesses, succession planning entails:
Preparing a Buy-Sell Agreement between the owners of a business; and
Providing Funding for the Buy-Sell Agreement.
A Buy-Sell Agreement contains the terms and conditions that will prevail in the eventuality of specific events such as death, disability, retirement or withdrawal from the business of the business owner. Its primary purpose is to ensure that the business continues and that the beneficiaries receive the fair market price for their interest in the business.
For most business owners, their business is one of their main assets. Business succession planning is also a way to protect your family in the event something happens to you and you are no longer able to receive income from your business.
How does a Buy-Sell Agreement Work?
There are many ways a Buy-Sell Agreement can be structured. One of the most common is that the agreement states the business owners agree to buy out the disabled/retired/deceased owner’s interest in the entity, usually at a specified agreed upon price.
Additionally, life insurance policies on each owner’s life is usually purchased, with the result that upon the death of a business owner, the beneficiary of the policy (the surviving business owner(s)) can use the insurance proceeds to buy the deceased’s share of the business from his family.
Funding a Buy-Sell Agreement
While a Buy-Sell Agreement provides a structure to ensure the smooth continuity of a business, a crucial issue remains – how do business owners source funds for the buy-out? There are different options available to fund a Buy-Sell Agreement, including cash payments from personal savings, third party borrowing, sale by installments, disability insurance proceeds, or life insurance proceeds.
The most effective, and least costly, method of funding is a combination of disability and life insurance. The most significant advantage of funding through insurance policies is that complete financing is guaranteed from the beginning. A lump sum payment to the deceased shareholder’s estate is generally feasible where life insurance proceeds are available to fund the payment.
When Should a Buy-Sell Agreement Be Executed?
Many owners of successful businesses put off executing a Buy-Sell Agreement until it's too late.
In short, the time to create a Buy-Sell Agreement is now!
If you have questions regarding a Buy-Sell Agreement or are interested in planning for the succession of your business, please contact us. We can assist with the drafting of the agreement and refer you to many great resources for the funding of the agreement.
Disclaimer: The information in this blog post (“post”) is provided for general informational purposes only, and should not be construed as legal advice from Leos & Gilkerson, PLLC or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a licensed lawyer.