3 Reasons to Have a Business Succession Plan
Creating and implementing a sound succession plan will provide several benefits to owners and partners:
• It ensures an agreeable price for a partner's share of the business and eliminates the need for valuation upon death because the insured agreed to the price beforehand.
• The policy benefits will be immediately available to pay for the deceased's share of the business, with no liquidity or time constraints. This effectively prevents the possibility of an external takeover due to cash flow problems or the need to sell business or other assets to cover the cost of the deceased's interest.
• A succession plan can greatly aid in allowing for timely settlement of the deceased's estate.
How much is the business worth?
When business owners decide to cash out (or death makes the decision for them), the first task is establishing a set dollar value for the business, or their share of it. This can be done via appraisal by a certified public accountant (CPA) or by an arbitrary agreement between all partners involved. If the portion of the company consists solely of shares of publicly traded stock, then valuation of the owner's interest will be determined by the stock's current market value.
Picking a Successor
Many factors determine whether a succession plan is necessary, and sometimes the logical and easy choice will be to simply sell the business. However, many owners prefer the thought of their businesses continuing on even after they're gone.
Choosing a successor can be as easy as appointing a family member or assistant to take the owner's place. However, there may be several partners or family members from which the owner will have to choose, each with various strengths and weaknesses to be weighed and evaluated. In this case, lasting resentment by some or all of those not chosen may result, no matter what choice is ultimately made.
Partners who do not need or want a successor may simply sell their portion of the business to their partners in a buy-sell agreement.
The Bottom Line
Proper business succession planning requires sound preparation. Business owners seeking a smooth and equitable transition of their interests should seek a competent, experienced advisor to assist them in this matter.
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** Some of the Information on this site has been derived from different resources such as the National Financial Planning Association, Securities and Exchange and Commission, Department of Insurance and Investopedia
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