How to Create a Business That Will Endure Through Succession Planning

Even if retirement is on a distant horizon, a business succession plan is beneficial for most companies and can become absolutely essential to protect the business from the owners’ death, disability, divorce and other common occurrences.

Here are some considerations when developing a sound business succession plan:

Choosing a successor. If you’re running a family business, this can either be easy or highly complicated, depending on how many children you have and if they each want a role in the company. You will first need to evaluate each successor on his or her strengths and weaknesses. You will also need to make a plan for those who will eventually take over to ensure that they will have the experience they need to succeed after you are gone. In a family business, there will also be estate and inheritance tax issues to be resolved.

If you plan to sell to a partner, a buy-sell agreement is a necessity to create the financial structure for your departure.

Business valuation. Determining a market value for publicly traded companies is fairly simple, but if your company is privately held, a valuation must be done via a certified appraisal or by an arbitrary agreement between all the partners as to how the business will be valued.

Business transfer methods. There are two common agreements for transferring business ownership: cross-purchase agreements and entity-purchase agreements. In a cross-purchase agreement, each partner in the company purchases and owns a life insurance policy on the other partners. Each partner is named as both owner and beneficiary on the same policy. When one partner dies, the policies are paid out to the surviving partners and those proceeds used to purchase the deceased partner’s shares in the business at a previously agreed-upon price.

With an entity-purchase agreement, the business purchases a life insurance policy on each partner and is named the owner and beneficiary for each policy. Upon the death of any partner, the business uses the proceeds to purchase the decedent’s shares. Under this arrangement, the cost of the policies is usually deductible for the business.