Marketing, Sales, Customer Service, Deliverables, Business Relationships, Rent, Technology, Logistics, Benefits, Payroll. When you’re running a business, it’s easy to get hung up on the day-to-day activities and forget to plan for your future. Business Succession Planning is not only the key to the longevity of your company, it’s also a critical component in making sure your family is protected in the event of your untimely death or disability. Don’t wait to plan – it could cost you more than you realize.
It’s estimated that over 50% of the US Gross Domestic Product (GDP) results from the efforts of family-owned businesses. But many of these businesses will fail to make it to a 2nd or 3rd generation due to improper planning. In fact, less than 1/3 of family businesses are successfully passed on to the next generation . When an owner dies suddenly, it can create chaos for their family and their business. Grieving family members question their financial security and how to manage the business. Employees worry about their job security, and executives in the company wonder about their positions as successors. This insecurity can trickle down to the customer, who may ultimately decide to take their business elsewhere.
To protect your professional legacy and family inheritance, as well as properly transitioning your business to the next generation, consider the following:
- Have you chosen a successor? Have you educated and trained them in all aspects of the business and communicated your desires for the future?
- Are your family members aware of your plans for the business upon your death? Do they understand who will be running the business and what share they may have in it?
- Have you worked with a financial planner, CPA, and attorney to prepare legal documents that make sure your key employees, successor, and family are fairly compensated upon the transition of the business?
Buy/Sell Agreements are documents that should be executed to put owners, key employees, and successors on the same page with regard to the future of the business. These agreements are typically funded with life insurance, and provide details to ensure that surviving business owners are able to “purchase” the deceased owner’s share in the business. This results in a coordinated transition because the purchase price and funding are already established prior to death.
Solidifying these agreements now can help expedite the future business transition and reduce delays in estate administration for your family and heirs. This pro-active decision-making can alleviate stress and uncertainly for your family in what is sure to be a very difficult and emotional time. Depending on the structure of your business, and the number of participating owners and family members, there are several types of Buy/Sell Agreements to consider:
- Cross Purchase Agreement: In this arrangement, the remaining owners agree to buy each other’s business interest in the event of one owner’s death. These are common when there are 2 owners in a business.
- Redemption Agreement: The company itself will purchase the deceased owner’s business interest.
- Hybrid Agreement: The remaining owners of the business or the business itself can buy the deceased owner’s business interest. The flexibility of this agreement allows the remaining parties to decide the best option at that time.
Each design has its own benefits, with different tax consequences, so make sure to coordinate with your advisors to determine which one best fits your needs. Be proactive and take care of the necessary legal arrangements to protect your business, your family, and yourself. Talk to your PSG Advisor about the options and make your future a priority now. 301-543-6000.