Business succession planning is a series of logistical and financial decisions about who’ll take over your company upon retirement, disability or death. To compose a succession plan, the initial step is to recognize the perfect successor to take over the business, then determine the best-selling arrangement. This usually involves a buy-sell agreement, secured using a life insurance plan or loan.
There are 5 common ways to transfer ownership of your business:
- Co-owner — Selling your shares or ownership interests into some co-owner(s)
- Heir — Passing ownership interests to your relative.
- Key Worker — Selling your company to a key worker.
- Outside Party — Selling your company to an entrepreneur outside your organization.
- Company — For a business with many owners, you may sell your possession interests back to the company, then disperse to the rest owners.
This manual covers each of these succession program types in greater detail.
Why It Is Important to Write a Succession Plan
Succession plans are generally associated with retirement, although they also serve an important role earlier in the company lifespan: In case anything unexpected happens to you or a co-owner, a succession plan can help reduce headaches, play and financial loss as your business grapples with a transition.
A series plans makes it clear that will take over the business, reducing any potential disputes between parties. When a purchase is concerned, the sale price and buy terms will also be clearly summarized, relieving some of their stress for your departing owner’s family.
To put it differently, a well-crafted succession plan intends to benefit everyone — the leaving owner, their loved ones, the business and the successor.
The 5 Kinds of Succession Plans
Here are the 5 most common Kinds of small business succession plans in detail:
1. Selling Your Business to some Co-Owner
Should you founded your company with a spouse, you may be contemplating your co-owner(s) as a possible successor. Many ventures draft a mutual agreement which, in case of a single proprietor untimely death or disability, the remaining owner(s) will agree to obtain their business attention out of their next of kin.
This type of arrangement can help alleviate the burden of a sudden transition– for the business and family members alike. A partner may be interested in keeping their shares, but might not have time investment or experience to assist it blossom. A buy-sell arrangement ensures they are given fair compensation, and enables the remaining co-owner(s) to maintain control of the business enterprise.
Possible Drawbacks
A buy-sell arrangement with a co-owner wants a lot cash kept on-hand. Your co-owner needs to be prepared to buy-out your stocks, theoretically, at any given moment.
Since not everybody keeps liquid money around in this magnitude, many businesses will finance their strategy with life insurance. Term life insurance is relatively cheap, and can offset a good deal of prices in the case of an owner’s departure. Permanent life insurance is a bit more costly, but could likewise payout in case of disability or retirement.
If you decide to write a buy-sell agreement with your co-owner, you’ll want to be sure that a life insurance policy is stipulated in the agreement. We recommend speaking with an expert for specific aid on the sort of policy you are going to want.
Pro Tip: Fund Your Succession Plan with Permanent Life Insurance
Alex Kim, AXA Advanced Markets
Succession planning or business continuation funded with life insurance provides flexibility for business owners. Though term insurance may be used to meet the needed funds at death, it is the versatility of permanent life insurance coverage that makes it the funding vehicle of choice to meet multiple goals.
A properly funded life insurance coverage can potentially prevent income tax on buildup and provide the funding solutions for buyout at death, retirement, disability or other events
AXA rated number one worldwide insurance brand for its 8th consecutive year also is the host of the report. All Guarantees are based solely on the issuing insurance company, either AXA Equitable Life Insurance Company or MONY Life Insurance Company of America. Follow the link below for a free quote on your life insurance policy.
Visit AXA Equitable for a free quote
2. Passing Your Company Onto An Heir
This is a popular alternative for business owners who have children or family members working in their own organization. What greater way to look out to your family than supplying them a full-running enterprise, who better to uphold the mission of your company than your family?
Of course, like any major family choice, it may stir a lot of conflict if not planned correctly.
First things first, there’s the question of who will take over. If you have only 1 relative who works alongside you, this is a simple choice. It could get complicated when you have several children, nieces or nephews, and more than you’re considering taking over the business. In this case, you want to offer clear instructions on that will take over exactly what , and how other heirs will be compensated.
Broadly speaking, you don’t want to give ownership to family members that aren’t involved in the company. Rather, many succession plans include a buy-sell agreement, where your heirs that are not active in the company agree to sell their stocks to those who are.
In terms of your heirs that do operate in the business, you typically still wish to pick a single successor, as opposed to splitting ownership evenly between your heirs. There are exceptions, like a division where one successor can focus on sales, and the other on product development. But businesses are usually far more difficult to handle multiple decision makers.
Possible Drawbacks
Making business decisions within a family can get cluttered. Emotions can get unhinged, particularly after an untimely death or disability. This can be compounded with the fact that 2nd manufacturing businesses are insecure; only 30% stay afloat after an inheritance.
Absolutely, this should beg the question; is inheritance even the best idea? In case your successor is proficient and business savvy, then maybe the solution is’yes.’ Otherwise, you may consider selling your business to a co-owner, key employee, or external buyer instead.
3. Promoting Your Business to a Key Employee
Whenever you don’t have a co-owner or household member to entrust with your small business, you might think about selling it to a key employee instead.
Have a peek at your org chart. Deciding upon an employee who is seasoned, business-savvy and admired by your staff can ease the transition. You have the ability to train themand receive them on board with fundamental procedures and relationships. If you’re concerned about keeping quality following your departure, an integral employee is generally more reliable compared to an outside buyer.
Just like selling into a co-owner, a key employee succession plan demands a buy-sell arrangement. Your employee will agree to obtain your business at a predetermined retirement date, or in the event of death, disability, or other circumstance that renders you unable to manage the business.
Possible Drawbacks
A frequent disadvantage to key employee series is currency . Most employees aren’t in the financial position to buy the business they work for; and even if they are, having enough liquid cash on hand is another challenge.
One alternative is seller financing, where your worker pays you (or your family) back over time. There’s typically a down payment of 10 percent or higher, then quarterly or monthly payments with interest before the purchase is paid for in full. The exact terms and conditions of the loan will should negotiated, then clearly laid out on your succession plan.
The drawback to seller financing is the total amount of time it can take for you, or your loved ones, to get paid . If you’re looking for a faster transaction, a more appropriate option might be an acquisition loan. This can be a loan obtained by your buyer from the SBA or a lender for up to 70-80% of the purchase price.
Pro Tip: Perform a Full Scan of your Organization
Doris Spies, Talent Benchstrength Solutions
I once consulted a business that had been scanning the project boards for months, attempting to recruit a new successor. Shortly after we started, it became clear there was an employee already in the business who matched each of their criteria.
Business owners often forget all of the skills their employees have. We examine their resume after when they’re hired, then file it off. For a decision as large as choosing a successor, it is well worth resurfacing these specifics. Then it’s possible to run a complete, systematic scan of your talent, and find the best candidates.
4. Promoting Your Company to an External Party
Whenever there isn’t an obvious successor to take over, company owners may look to the community: Is there another entrepreneur, or even a competitor, that would purchase your small business?
This is simpler for some kinds of companies than others. If you own a more turn-key surgery, like a restaurant with a fantastic general supervisor, your job is just to demonstrate that it’s a fantastic investment. They won’t have to get their hands dirty (unless they need to) and will still have time to concentrate on their other business pursuits.
On the flip side, if you have a property company that is branded under your own name, selling might possibly be harder. Buyers will recognize the need to rebrand and remarket, and as a result, may not be inclined to pay full price.
Instead, you must prepare your company for sale well in advance; hire and train a great general supervisor, formalize your working procedures, and receive all your finances in check. Make your company as secure and turnkey as possible, so it’s more appealing and valuable to outside buyers.
Potential Drawbacks
The most important drawback to an outside sale succession plan is the sudden: You can not predict exactly what a new owner will have in store. The company’s mission could pivot; staff could change; client associations could dwindle. If you’re promoting your company in order to retire, you will generally be a whole lot more isolated from the business with an external buyer, instead of a relative or key worker, who may still seek your information.
Additionally, much like the other types of arrangements, you’ll need to draft a buy-sell arrangement. Based upon the buyer’s capacity, you may need to back up the arrangement with vendor financing, or a acquisition loan.
5. Promoting Your Stocks Back to the Business
The fifth alternative is available to businesses with several owners. An”entity buy plan” or a”stock redemption plan” is an arrangement in which the business purchases life insurance on each one of the co-owners. If one owner dies, the company utilizes the life insurance policy proceeds to purchase the company interest from the deceased owner’s estate, thus giving each dwelling owner(s) a bigger share of the business.
Entity purchase agreements are more viable when you have over a couple of owners, so it is not as common in a small business context.
Potential Drawbacks
A thing purchase is similar to a cross buy, in which you sell your shares to a co-owner, or co-owners, except here the business agrees to buy the ownership interests.
In most circumstances, a cross order is much more financially viable. Whenever your co-owners purchase your shares directly, they get a”step-up in basis,” so the stock’s basis is re-valued at its current cost. Having an entity buy, the original basis remains, and your co-owners will probably be liable for potentially higher capital gains.
Despite this drawback, thing purchases can still be beneficial when you have a large number of co-owners. Drafting cross purchase agreements with every owner can be cumbersome. An item purchase arrangement, in contrast, is much simpler to execute. It may typically be funded with one life insurance policy for each co-owner.
ProTip: Update Your Succession Plan Regularly
Alex Kim, AXA Advanced Markets
Because it’s a legal document, a business or company owner should enlist professional legal assistance to craft the best deal and ensure it is properly executed. The agreement also needs to be updated periodically to reflect modifications to business evaluation, such as potential gains to lifetime insurance policy financing the buy-sell arrangement to signify greater price of business.
AXA rated number one worldwide insurance brand for its 8th consecutive year also will be the host of the article. All Guarantees are based solely on the issuing insurance company, either AXA Equitable Life Insurance Company or MONY Life Insurance Company of America. Follow the link below to get a free quote on your life insurance plan.
Visit AXA Equitable to get a free quote
The Most Important Thing
Though some experts recommend beginning your small business succession planning 3 decades before retirement, it’s never too early to start. Many decisions you make during your small business lifespan, like that you hire and promote, can considerably affect your transition choices in the future. It is far better to be mindful of your eventual succession choices than be taken by surprise.
That’s not to mention another crucial use of a succession plan, that will be to prepare for the unexpected. Particularly when you have family members, or co-owners to think about, a series plan significantly reduces headaches and anxiety in the event of an operator’s abrupt departure; for instance, by making sure you and your loved ones get the full value out of your company.
To begin composing a business succession plan, make sure you talk with an expert who will assist you in finding an perfect financial arrangement.
AXA S.A. has been rated the No. 1 insurance company in the world by Interbrand for nine consecutive years as of Sept. 26, 2017.
Applications for life insurance are subject to underwriting. No insurance policy exists unless a policy is issued and the required top to set it in force is paid.
Please be advised that this document isn’t intended as tax or legal advice. Thus, any tax information given in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that could be imposed on the taxpayer. The tax advice was written to encourage the promotion or marketing of this trade (s) or matter(s) addressed and you need to seek advice based on your individual circumstances from an independent tax adviser.
Under present federal tax rules, you generally may take federal income tax-free withdrawals up to your foundation (total premiums paid) in the policy or loans from a life insurance plan that’s not a Modified Endowment Contract (MEC). Certain exceptions may apply for partial withdrawals throughout the policy’s initial 15 decades. In the event the policy is a MEC, all distributions (withdrawals or loans) are taxed as regular income to the extent of gain from the policy, and may also be subject to an extra 10% premature distribution penalty prior to age 591/2, unless specific exceptions are applicable. Loans and partial withdrawals will reduce the death benefit and cash value of your life insurance coverage and may be subject to coverage limits and income tax. In addition, loans and partial withdrawals can cause specific policy benefits or cyclists to become inaccessible and may increase the chance that your coverage may lapse. If the policy lapses, is surrendered or becomes a MEC, the loan balance at this time would generally be viewed as dispersed and taxable under the rules for supply of policy cash values
AXA S.A. is a French holding company for a group of international insurance and financial services companies, including AXA Equitable Financial Services, LLC. (AEFS).
AXA Equitable and its affiliates don’t endorse any of the business lawyers listed in this article.
“AXA” is the brand name of AEFS and its family of companies, including AXA Equitable Life Insurance Company (AXA Equitable) (NY, NY), MONY Life Insurance Company of America (AZ stock company, admin. Office: Jersey City, NJ) (MLOA), and AXA Distributors, LLC. All class insurance products are issued either by AXA Equitable or MLOA, which have sole liability to their insurance and claims-paying obligations. Some products aren’t available in all states.
GE-130686 (10/17)(Exp. 10/19)
