Every business should have a succession plan that provides for what will happen to the company in the event of an owner’s death or disability. This is essential to maintaining the value of the business for heirs and co-owners (if you have any). If you are an owner and don’t have a plan and something happens to you, your co-owners and family will be left to try to run and/or sell the business without necessarily knowing how to do it properly. A succession plan addresses both corporate and estate planning legal issues so consulting an experienced attorney is essential to protecting the business and its owners. Some of the key concerns to determine include the following:
Who Will Run the Business When You Are Gone?
If you actively manage the company, someone will have to step into that role if you die or become disabled. Is there someone in place now? Could they take control immediately or do they still require training or other support? Can you start to transition them into your role? If there isn’t someone currently, what are your plans for finding an individual to replace you?
Are There Family Members Interested in the Business?
You might think your children or grandchildren would want to take over the business but do they really? Maybe they would just want to sell it. Or maybe some family members are interested but in what capacity? Are they capable of managing the business and if not, how will you get them to that point? If you have some relatives who want the business and others that do not, how will you divide your wealth? If you have co-owners, do they want to own the business with your family members?
Do Your Co-Owners Want a Buy-Sell Agreement?
A buy-sell agreement is a contract that sets forth how business interests are treated if a partner or owner dies or otherwise exits the business. Typically, the remaining owners of the company want control over who gets the departing owner’s interest. The agreement provides that the owners or the company can buy the departing owner’s shares and sets forth how to determine the value of the shares. This helps ensure the continued operation of the company and that the co-owners are not forced to work with family members who may have no knowledge or interest in the business.
How Can You Ensure Your Heirs Will Receive a Fair Price for Your Share of the Business?
The method for valuing the business should be included in the buy-sell agreement. However, it is also important to provide for how the business or the owners will pay for the shares. Usually, the purchase is financed with “key-man” life insurance. A life insurance policy is taken out on the life of each owner. After he or she dies, the insurance proceeds are used by the company or the co-owners to buy the deceased owner’s shares from the heirs. You must pay careful attention to who owns the policy and who is named beneficiary for this to work properly and to avoid tax pitfalls.
Business succession plans often raise a multitude of personal, family, business, and legal issues. Having the right advisors can make a substantial difference in ensuring that all concerns are addressed. Our attorneys provide comprehensive advice to business owners to help them maximize the value of their company in the present and for purposes of their eventual exit plan. Contact us to discuss your situation.