Business Succession and Business Continuation Planning

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Every business owner knows that building a successful company requires dedication, commitment and hard work. Once a company is established, business succession or business continuation planning becomes an essential part of the process to assure future continued grow. Business succession planning addresses all potential contingencies that may affect a business or business owner including retirement, sale of a business interest, disability or death. With prudent planning, a business can be assured that funds will be available to provide flexibility in the event of retirement, disability or death of a shareholder or sale of a business owner’s interest.

Business Succession Facts and Statistics

  • On average, 45% of the business owner’s net worth is tied up in the business. (LIMRA International, Small Business Owners 2005 Report)
  • Many business owners want to pass the company to the next generation. (Families in Business. NFIB National small Business Poll, 2002)
  • Only 26% of small business owners have some type of succession plan in place. (LIMRA International, Small Business Owners 2005 Report)
  • Fact: Many business owners are depending on the value of their business to fund their retirement.
  • Less than 30% of family owned businesses survive to the 2nd generation and less than 12% to the 3rd generation with only a 3% survival rate to the 4th generation. (Joseph Astrachan, Ph.D., editor, Family Business Review)
  • The leadership of 39% of family-owned businesses will have changed hands in the next five years. (Raymond Institute/Mass Mutual, American Family Business Survey, 2003)
  • 19% of family business participants have not completed any estate planning other than writing a will; only 37% have written a strategic plan; and over 60% are very positive about their company’s future. (Raymond Institute/Mass Mutual, American Family Business Survey, 2003)

Important Questions for Business Succession Planning

Before any formal planning can begin, every business owner must address the following questions.

  • What are the business owner’s personal goals? Will they retire, sell the company, or continue to run the company part or full time?
  • Are their any special family circumstances with the transition of the business?
  • Does the business owner want to gift the company to the next generation? Sell it to the employees or to a third party?
  • What is the business owner’s desire if he or she dies or is disabled?
  • Where will the funds come from to provide retirement income to the business owner or to buy their ownership interest?
  • What is the value of the business? (See, Determining the Value of a Business)
  • Can an outside buyer for the company be easily located?
  • What are the potential tax consequences of any of the above alternatives?

Components of a Sound Business Continuation Plan

A sound business continuation plan includes:

  1. Clearly defined goals of the shareholders or business owners.
  2. n accurate business appraisal or valuation.
  3. Identification of the appropriate measures to minimize business risk and protect the company’s reputation and position. Examples include key employee insurance and executive benefits packages.
  4. A realistic assessment of the “market” for the business in the event of a sale.
  5. Establish a formal written agreement commonly referred to as a buy-sell agreement that will set in place the directives for the plan.
  6. Funding vehicles such as life insurance and disability policies used to provide the liquidity needed if death or disability occurs or if an owner retires.
  7. A formal process for periodically reviewing and updating the plan.

When establishing a business succession or business continuation plan, each business owner’s estate plan should also be carefully reviewed. Critical business succession decisions will be influenced by their impact on the individual estates of each owner. For additional questions regarding business succession planning or estate planning, please call MEG Financial at (877) 583-3955 or complete a simple online question form now.

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