I recently went to some offsite training at The Herbert Legal Group’s office where John Herbert put together a great session on Succession Planning and how it can be funded with the least disruption.
There will come a time that all business owners will come to and it can’t be avoided, the time when the business needs to be closed down or have its ownership transferred over to a new owner. This is especially relevant for businesses that have fewer owners where a transfer of ownership is a significant event. There are may types of triggering events, and you could end up with the partner you never planned on. Succession planning will help significantly.
Events that trigger a change in ownership
As I mentioned, there are a number of triggering events. The good news is that some are insurable and it is usually prudent to insure where you can. Death and disability are both insurable and if properly insured, policies can provide the funds to facilitate the transition.
Other events aren’t insurable and can lead to more complicated situations. Divorce, retirement, or a desire to move on to something different are all reasons why ownership may need to change.
Does it make sense to terminate the business?
More than likely the idea of shutting down a successful business is unappealing. So many resources have been poured into building it should have some sort of value that can be captured by a new owner. There are instances where the business is the owner’s reputation, and when they leave the business it’s often hard to sell the business. In this case it is more appropriate to terminate the business or sell it for Book Value. Fortunately, more often than not it makes more sense to put the business under new ownership which will reap a higher valuation.
Have you planned for business succession?
Succession planning is designed for something like this. Here is an example. Your co-owner passes away and your new business partner, his or her family, has no interest in keeping their interest in the business. Likewise, you never wanted them as your business partner. A well written life insurance policy can often solve this type of issue and help streamline the transfer of ownership.
Buying the right type of insurance with the right coverage and beneficiaries is crucial. For instance, sometimes you need to have the company be the beneficiary, sometimes the owners, and sometimes you are better served by setting up a trust. I’ll leave it at that and tell you to talk to a knowledgeable Business Insurance Broker.
Insurable events that have been insured, can ease the transfer of ownership. Uninsurable events are harder to manage but with a well thought out Operating Agreement
some of the risks can be mitigated. This should be handled with a knowledgeable Business Law Firm.
We’d like to help you with your succession planning needs
The Shared Finance Center provides outsourced accounting, bookkeeping and CFO support to small business owners and in doing so we heavily focus on maximizing cash flow. If you think that this post would be helpful to anyone you know, please pass it along. Also, please follow our blog (follow link) for regular tips to grow your business.