When the unexpected hits your business, you need to have something in place that keeps it, and you, protected. Now, you may be saying that you have some sort of understanding in place, but when trouble hits, understandings can be easily misunderstood! Legal paperwork helps prevent both questions and problems. Working with a financial advisor to build your business succession plan means all your hard work isn’t going to disappear like seafoam.
A succession plan is a detailed layout of how your business will respond in the event of organizational instability. While this seems like something that’s only for Fortune 500 companies, as a business owner, you must ensure that you and your business don’t wind up folding when one crucial person dies or retires.
What goes into a business succession plan?
So, what is succession planning? Think of it like a will, but with more far-reaching scenarios and consequences to consider. Close to 60 percent of business owners have no transition plan, making them vulnerable. With the help of a financial advisor, businesses stand a stronger chance of long-term survival beyond the handover.
Any succession plan needs to cover at least three basic areas.
Every business has its structure. In the event of serious injury to one partner, for example, it may seem obvious that the other partner would take over. But there are a few more questions to ask, including the duration of the takeover and, more importantly, knowing who would step into the other work gaps that would result.
A company of two partners will require different succession plans than one co-owned by multiple executives. Perhaps the hardest situation to plan for is the business one person runs on their own. Who can step in and do what you do? Perhaps it’s time to look at your employees with an eye to succession. You don’t want to be the only one who knows how to run your company.
There are a variety of business insurance vehicles that can come into play when dealing with succession planning. For example, there are trauma and disability insurance schemes that would be used to pay for a replacement manager, while the company looks for someone more long term.
Key person insurance is an option for a variety of scenarios, because it can insure any person your business relies on. Consider a policy on each vital executive in the business.
Insurance also exists to cover business expenses in the case of emergency financial losses. Understanding which vehicles best fit also has tax consequences, so it pays to have qualified help.
In the case of incapacitating injury or illness, your succession plan can include a power of attorney, which assigns a trusted person to make decisions in your place. For permanent incapacity, retirement, removal or death, a succession agreement dictates the best person to take over your role. This agreement is about filling the spot with the right person, so that your family’s future financial well-being stays strong. It’s a delicate dance that needs complex consideration.
In a business of two partners, it may be necessary for the surviving partner to buy out the deceased partner’s interest in the business. This can be codified in a buy/sell agreement. Because the survivor may not have liquid cash on hand to buy the shares, it is common for partners to have life insurance on one another.
Alternatively, the plan may state that the business itself buys out the deceased owner, increasing the value of the remaining shares. In this case, the business will need to have money ready to do it, whether using life insurance or savings.
If you plan to hand over a business to a family member, consider carefully who is both willing and able to take over. A family member who doesn’t want your business will promptly sell it off. One who isn’t competent will run it into the ground. If you want your hard work to last beyond you, choose someone already knowledgeable about your business, even if it means looking outside your family.
Ready to Make a Plan?
If this sounds great, but you wouldn’t know where to start, or worry you wouldn’t even have the time to handle it all, you need help. AdviceChaser helps business owners multiply their time by matching them with qualified financial advisors. While you work on your business, your qualified financial advisor will help you to protect it.