Do you have a small business with a partner or a family owned business and it’s a business that will continue after you have decided to exit or retire?
Do you have a succession plan in your business?
Somewhere around 70% of small businesses do not have simple agreements in place to protect the business owner and the business. Far too often you may have gone into business with a friend, and you have a verbal agreement, or in the case of family business you believe that your son or daughter will take over.
Ask yourself this:
If your partner died would you want their spouse as your new partner?
Does your son or daughter really want to take over the business and are they capable?
A good succession plan will take into account the goals of the business, time frames, a valuation of the business, and contingency plans which will cover death or accident. The plan will also contain insurance and ownership of this cover, a very important part of the process. If the ownership of the insurance policy is not established correctly, the proceeds of the life insurance can attract Capital Gains Tax; which will greatly reduce the amount that the surviving spouse will receive. Putting together a succession plan is important for those unexpected life situations but also for those situations when you or your partner make the decision to retire. In this instance your plan should include how you will fund a retiring partner.
So where do you start?
Let’s face it when we start a business often we don’t start with the end in mind but one thing is critically important and that is to get a business plan done. Speak with your financial adviser to discuss in detail the current financial position of your business and outline what you and your partner want for the future including should something unexpected happen. Once you agree on the terms your adviser will seek the services of a lawyer to draft the document which will include a buy/sell agreement. Your adviser can also get the insurance cover in place and structure it correctly.
It’s important to carefully review the agreement every few years to make sure that the valuation of the business is in line with any growth and the life policies still have the right amount of cover for each partner.
Don’t let cost be prohibitive! Creating a good succession plan can be expensive and can sometimes be off-putting to the people getting the work done. Consider your succession plan a security blanket for you and your business to deal with all eventualities. The cost of not doing it is far greater if something unfortunate occurs; in that instance the only ones who win are the lawyers.