If you own a business, you know how important it is to make plans for the future. Whether you’re a sole proprietor or have other co-owners who work with you, the need to plan includes the eventual transition of your business when you are ready to move on. When you leave your business, either because you’ve decided to retire, or because you become disabled or pass away, you need to make sure that:
- your loved ones will receive the benefit of the business you’ve built
- your business will continue to thrive
Without proper planning, the business could lose value, or even go out of business, in the transition from you to its new owner. Your employees could be left without direction, or even without jobs, if plans aren’t made for the effective transition of the business to the right new owner. Ultimately, the legacy you spent a lifetime building could fall apart without the proper care and planning set in place today.
Types of Business Succession Planning
The type of plan you will need to put in place will depend on the current ownership of your business, and the person who would be taking over the business for you.
Below are several options that you the owner have when choosing what plan to put in place for the sale or transition of your business.
Selling to Family
In a family owned business, it’s important to have a clear understanding of how the business will transfer from one generation to the next. A clearly spelled out plan for the transfer of the business is critical to avoid (1) power struggles and misunderstandings among siblings, and (2) how business assets and other personal assets will be divided to make the plan “fair” for all involved. In these situations, we can use Living Trusts, Buy-Sell Agreements, Family Limited Partnerships, Self-Cancelling Installment Notes, or other planning tools to accomplish your objectives.
Selling to Key Employees
If you don’t have a co-owner or could consider selling the business to a key employee. You could accomplish this through a Buy-Sell Agreement, which sets forth the key terms for the sale of the business at some time in the future. The Buy-Sell Agreement can set an established price, or it can set forth the manner in which the future sale price would be calculated. It can also establish the “trigger” for the sale, whether it is your death, your disability, or your retirement from the business.
Selling to Co-Owners
If you have a co-owner in the business already, then they would probably prefer to buy your interest in the business when you leave, as opposed to having you sell to a third party (just as you would prefer to buy them out instead of having them sell to someone else). Once again, this is typically handled through a Buy-Sell Agreement. As with the agreements with key employees, the Buy/Sell Agreement sets the key terms and the trigger events.
Paying for the Purchase
Clients often wonder where the funds for the purchase of the business will come from. That depends in great deal upon the circumstances of the sale. It is a good idea to fund the Buy/Sell Agreement with life insurance. The life insurance creates cash at the death of the insured, which can then be used to pay the purchase price for the business. The possibilities of disability or your retirement can be addressed in the Buy-Sell Agreement as well, using such tools as promissory notes or deferred compensation plans, to provide for the purchase price.
When Should I Start Planning for the Transition of My Business?
The time to get this planning in place is not when you’re getting ready to retire, or if you’ve become sick. The time for planning is right now. Having a concrete plan in place, and making sure that the important people like your family or key employees are aware of it, is a critical step in ensuring the future of your business. No matter what happens to you, you should be confident that the business is in the hands of people you trust to carry out your wishes and make sure the business continues to grow.
Even if you’re just getting the business started now, this is still the best time to put your succession planning in place for the future. The plan can always evolve as your business does, but having something set down on paper will make sure that no matter what happens, your life’s legacy will be safe.
By planning now, you have the advantage of:
- Thinking through the important questions and answers in a “non-emergency situation.” This helps ensure that the answers will be well thought-out, and will be based on sound business analysis and thinking.
- Having more potential options available to you and having “time on your side” to work though the issues.
- • Using your good health to qualify for the life insurance necessary to fund a Buy-Sell Agreement.
No matter what your business, your current business ownership, and your future business goals, you need to have a business succession plan in place today. If you have any questions about the establishment of a Succession Plan for your Perrysburg or Toledo area Business, you can call the Legacy Law Group at 419-872-7670 to schedule an appointment with one of our attorneys to discuss your options.