Business Succession Planning

 

One of the most overlooked items on the small business owner’s plate and often one of the most expensive and detrimental problems an owner faces is a business succession plan.   Consider the following:

Mark and Jay are co-owners of a small business, with Mark owning 70% of the business and Jay the remaining 30%.  Jay has become completely unhappy in their current business arrangement and wants out.  Although Mark and Jay were best of friends and college roommates the stress of running a business together has created tension – to the point of Jay wanting out.  The thought of dissolving the partnership never crossed their mind when they started out 3 years ago.  The business has grown from a 2 person firm to a company with 15 employees and annual revenues exceeding 3.5 million dollars a year, in a little over 3 years.  As no pre-planning was ever done or even considered, valuing the business, and deciding on an equitable buy out amount has created even greater friction between the two, once best friends, and has spilled over to their family life.  Without proper planning from the start, each has now retained the help of an attorney.

Business succession planning, if done correctly, should start with a written agreement between all owners, and at a minimum plan for the orderly transfer of an owners’ interest upon any of the following items:

» Death
» Disability
» Retirement
» The voluntary or involuntary termination of a business owner

These written agreements are what are normally referred to as a “Buy-Sell Agreement”.

The above events or “triggers” to the orderly separation of the owners’ interest are not all inclusive.  Owners may want other events to trigger the agreed upon separation from ownership. 

When creating a “Buy-Sell Agreement” it is highly recommended that a business planning attorney and CPA be brought into the picture to properly structure the agreement.  Items such as business valuation, business and personal income taxes and estate tax issues need to be addressed. 

With the agreement written, step 2 is to determine how best to fund the agreement.  There are several methods used to create the funding for a buy-sell agreement, all of which have advantages and disadvantages.   A careful look at each is critical as there are tax, and business continuation issues at stake. 

»  Use the personal funds of the remaining owner
»  Create a sinking fund in the business
»  Borrow the funds
»  Create a promissory note
»  Purchase life insurance

For more information give us a call to discuss your business planning needs.  We may be reached at 405. 720-0333.