Business Succession

Entering into business succession planning is imperative for anyone that owns a company. This strategy is necessary for passing ownership of the business or protecting it against the loss of a key employee.

Developing a business succession plan lets owners choose a successor to take over the company in the event of retirement, death, or if tragedy strikes and prevents the owner from performing their duties.

In addition to choosing a successor, owners need to establish a value for the business. If multiple partners are involved, values can also be established for each partner. Business values can be obtained by conducting an appraisal of business assets, purchase orders, accounts receivable, and shares of stock.

Depending on the size of the company, appraisals are either conducted by a certified public accountant or an agreement that is created amongst the partners. Stock values and business assets are based on current market value.

Upon receiving the appraised business value, owners purchase a life insurance policy for their self or each individual partner. The company is assigned as the beneficiary to receive death benefits. If a partner passes away while still active in the company, death benefit proceeds are used to purchase their share of the company.

Owners can choose to establish either cross-purchase agreements or entity-purchase agreements. Cross-purchase agreements require each business partner to purchase a life insurance policy for all other partners. If there are four partners and the business value is $2 million, each partner would carry a $500,000 life insurance policy on the other three partners.

Entity-purchase agreements are purchased by the company instead of business partners. Each partner is listed as a beneficiary. Upon death, proceeds are used to purchase the deceased partner's share of the company.

Setting up business succession plans offers multiple benefits to owners and partners. First and foremost, the plan ensures that the business can continue operating without interference if the owner or partners pass away.

Obtaining a business value appraisal informs all partners how much the company is worth so they know how much it will cost to buy out partners in the event of death, disability, or retirement.

Purchasing life insurance policies for owners or partners ensures that the company can continue on without loss of cash flow and helps make the transition occur more smoothly.

Establishing proper business succession requires help from a qualified attorney. Many people find it beneficial to work with an estate attorney so they can pass along their portion of the business to heirs.  

Succession planning goes hand-in-hand with estate planning and retirement planning. Just as your personal assets need to be protected with Wills and trusts, so does your company. If you own a business and pass away prior to writing a Will there will be numerous complications for your heirs and business partners.

Estate planning can help minimize estate tax and inheritance tax, along with transferring ownership shares to partners. Creating a retirement plan ensures the company will continue to operate without interruption when you pass the torch to successors.

Whether you operate a family-owned business, partnership, corporation, limited liability company, or sole proprietorship it's important to take action to protect everything you've worked so hard to create.

At Craton and Switzer, we work with clients to make certain they cover all bases of asset protection. Our estate attorneys can help establish estate planning strategies to keep assets out of probate and easily pass along inheritance property to heirs and business partners.

 There is no better time than today to get started creating your business succession plan. We invite you to contact us and schedule a consultation to discuss your needs. We also invite you to learn more about probate, Wills, trusts, and succession planning at our asset management blog.