If you have clients who own family businesses, very often the firm is the largest asset in their estate. Unfortunately, many business owners fail to address the need for succession planning because it is human nature to put off decisions concerning disability, retirement or death.
Upon the departure of a business owner, the business will be continued, sold or liquidated. Therefore, succession planning is necessary to ensure an orderly transition of power to new owners, and to provide continuity for employees and existing customers.
A properly drafted and adequately funded buy-sell agreement can provide financial protection for both the family and the business. Designed effectively, the plan can allow surviving family members and owners to enjoy ongoing economic support for multiple generations. Consequently, it is critical that you discuss succession planning with your business owner clients, regardless of which organizational structure they have established to operate their business.
Additionally, a business succession plan can help ensure that family members of a deceased owner receive fair value for the business interest and that surviving business owners secure control of the enterprise. Buy-sell agreements funded with life insurance can provide the infusion of cash–precisely when needed–to ensure the right property passes to the right person at the right time, in a tax-efficient manner.
To help your clients better understand the importance of creating a cohesive business succession plan, you might have to ask uncomfortable (or disturbing) questions. However, getting your prospects and clients to look closely at potential problems with their existing plan, or of not having a transition plan, will help them recognize that business succession planning is not a luxury but a necessity.
What follows is a list of questions for you to share with business owners of privately owned enterprises. Can your business owner clients answer all of them? If not, they'll need your help and guidance to start the process of business succession planning.
1. Has the owner selected a successor? If yes, has the owner shared the selection with other family members, co-owners, employees and key customers?
2. Is there a formalized plan for successor ownership and has an attorney prepared a written buy-sell agreement? If yes, do the terms of the agreement clearly detail how each owner's interests in the business will be distributed in the event of the disability, retirement, bankruptcy, divorce or death of an owner?
3. Do the business owners have a current business valuation, prepared by a competent valuation expert, for valuing each owner's interest in the business? If yes, is the pricing formula fair to all parties? And does it include the value of goodwill, an intangible but often valuable asset?
4. Are children of one or more owners involved in the operation of the business? If yes, what financial arrangements have been made to provide for children who are not active in the business upon the departure of a business owner?
