Your business is much more than just a number on a net worth chart. It is a complex organism that requires careful tending.
Passing on your business is a little like repotting a plant. When everything goes as expected, your business thrives and provides for your family. But without a comprehensive succession plan, your business may have to be repotted in a hailstorm, in the dark, by someone who doesn’t know what kind of plant it is.
What You Need is a Business Succession Plan
A business succession plan is designed to help you:
- Transition your business to the next generation successfully, seamlessly, and with minimum tax consequences
- Keep the business running smoothly if you or your partner retires, decides to change their work schedule, or is unable to work
- Avoid the distraction and risk of having to work with an unexpected new partner
- Realize the full value of your business if you decide to or are forced to sell your interest
Keep Your Business Running Smoothly
Having a business partner is a little like being married. It requires a close working relationship and the ability to make good decisions together. Problems can arise when people have conflicting priorities, different ways of doing things, or just plain clash personalities.
Of course, all of these problems can be avoided or addressed ahead of time when you choose your own business partners. But there are many situations which may lead to you acquiring a “surprise” new partner, including when your business partner:
- Sells their interest (or wants to sell) and you have no buy-sell agreement or shareholder agreement in place to prevent the sale
- Gets divorced and the divorce court awards the spouse a share of your partner’s interest
- Files for bankruptcy and the bankruptcy court puts a trustee in charge of your partner’s interest
- Passes away and leaves their interest to their spouse or children
It’s not just new partners that can disrupt a business. A partner who departs due to retirement, disability, or the loss of a professional license can cause turmoil. Having a business succession plan in place, including a buy-sell agreement, lets you focus on replacing the departing partner—rather than first worrying about what’s going to happen to their share of the business.
Realize the Full Value of Your Business
Many things can eat away at the value you or your heirs receive for your business. Assets may have to be sold or loans taken out to pay estate taxes. Your share of the business may be sold at a bargain price due to a poor negotiating position (for example, if you leave the business suddenly or your spouse inherits your interest).
A comprehensive buy-sell agreement can anticipate the reasons and ways your interest might be sold or transferred. You can then decide in advance how the purchase price will be calculated and where the purchase money will come from.
Both parts are critical to the success of your plan.
Without a predetermined price, there may be two sides at the negotiating table who were once friendly, but are now determined to get the best deal for themselves. People agree on price much more readily when the price could just as easily apply to a sale by themselves as a sale by one of their partners.
Price is a necessary first step, but it’s irrelevant unless there is money to fund the purchase. A buy-sell agreement can be funded in several ways, including through the use of life insurance or disability insurance. Some events aren’t insurable, though, such as retirement or termination. It’s smart to consider how a retiring or terminated partner’s interest will be purchased.