Business
Succession Planning
---------------------------------------
 Every
business, no matter how successful, will face one of
the following critical events at some point in time.
These events are:
1)
The owner or one of the owners will pass away. When
this occurs, the family of the deceased is immediately
placed into a position of partnership with the remaining
owners. Is the family knowledgeable and skilled enough
to promote the continued success of the company? Is
the family going to accept all of the unspoken agreements
that you had in place with your now deceased partner?
Does the family even want to be involved in the line
of business?
This
is a problem that businesses must face every single
day. If the newly formed partnership can not work, you
could always offer to buy out the new partners and continue
business by yourself, right? Of course. The problem
now is determining the value of the business. It is
not uncommon for your new partners to ask for two or
three times what you feel the value of the business
is in order to sell their portion of ownership. Even
if you overcome that obstacle, where is the money going
to come from? Can you afford to take the money out of
current income?
Although
you may think the death of a healthy partner in a business
is an unlikely event, you would be surprised. In fact,
the following chart demonstrates the likelihood that
one of the partners in a business will pass away before
the age of 65.
| Probability
Of At Least One Death |
| Prior to Age
65 |
| Ages*
|
Two
Partners |
Three
Partners |
| 30 |
41.5% |
55.2% |
| 35 |
40.4% |
54.0% |
| 40 |
38.9% |
52.3% |
| 45 |
36.7% |
49.6% |
| * Assumes
all partners are males of the same age. |
2)
The owner or one of the owners will become disabled
and unable to return to work. The number of cases of
disability is on the rise and the number one cause of
disability today is stress related. How would you feel
if your business partner was unable to return to work
because their doctor determined that there was too much
stress? I imagine you would give them some time off
to get their life back in order. What if this disability
lasted for three months, six months, over one year?
You
cannot pay a business owner the salary that they are
used to receiving when they are not putting in their
fair share of work. You will have to hire a qualified
candidate to help with all of the new tasks and their
salary will have to come from somewhere as well. The
proper planning would allow you to pay your partner
during their time of disability, buy out your partners'
% of ownership, and pay to hire and train a replacement.
3)
An owner decides to retire. This is obviously the most
desirable of the three events but still requires planning
over a period of years to ensure that the business will
continue successfully. The business has to change ownership
while minimizing taxes. The retired owner will expect
to be compensated either in a lump sum or on an installment
basis and it is very difficult to pay these expenses
out of operating income while trying to maintain profitability.
No matter how
much you would like to prevent all of these events from
happening, the best that you can do is plan for them
with the help of business continuation specialists to
minimize the negative impact. Even family businesses
that pass from one generation to the next require continuation
planning to minimize tax implications and allow for
asset equalization. There are many business continuation
plans available and we will work with you, your attorney,
and your accountant to implement the plan that best
meets your needs as a business owner. Among the most
common types of continuation plans are the following: |
