Business continuation planning can be difficult for clients, especially with all the day-to-day problems that need immediate attention. But lack of planning can be devastating.
According to a study conducted by the U.S. Small Business Administration in 2000, only 30% of family businesses pass successfully to the second generation. Chief reason: The first generation of owners failed to plan for the orderly transfer of the enterprise.
Common among such owners are Jerry and Elizabeth, a married couple and co-owners of Regal Printing, a successful print shop (C corporation) they started 25 years ago. They have two employees but manage the business themselves.
Jerry and Elizabeth pooled their savings to get the business off the ground and have spent their lives nurturing it. It is by far their largest asset.
Their oldest daughter is very active in the company, but their other two children are too young. Will any of their three children run Regal Printing some day? Or will one of their key people? That depends.
A family business is often the owner’s major asset. The death or disability of a business owner (who is usually the key to the success of a business) seriously can damage the business’s value.
Good planning can minimize these risks substantially. Let’s look at why some owners plan for business continuation while others do not, the methods and tools to transfer business interests, and how to begin developing a plan.
“Business continuation planning” simply means planning for the transfer of business ownership and management from the current owner to someone else. There are a number of good reasons why owners should plan for the transfer of their businesses, such as avoiding the business passing to underqualified owners, protecting key employees or raising cash.
However, most of the time the planning is done simply to “keep the dream alive,” to make sure the business extends beyond the owner’s lifetime, as in Jerry’s case. Few business owners work for a lifetime only to decide consciously to let their business dissolve when they’re no longer able to manage it.
Every business owner should consider having a buy-sell agreement to assure the continuation of the business and to protect the owner and his or her family. However, owners frequently don’t know what they want to do, nor do they understand the various options open to them. Buy-sell agreements work no matter what form a business takes: sole proprietorship, partnership or corporation.
Beyond taking that all-important first step and getting the agreement set up, having the dollars available to make the transfer happen is also key. Generally, the most convenient and least expensive method of funding the buy-sell agreement is through life insurance. Buy-sell agreements funded with life insurance help establish a value for the business, provide liquidity to support the family and prevent family involvement when the owner wants control to transfer to business associates.
Clearly, a buy-sell agreement best protects owners and families if arrangements are made prior to death or disability. And funding the buy-sell agreement so the dollars are there when needed is essential.