Many Nevada businesses don’t have a viable business succession plan in place. In fact, recent data indicate that only six out of 10 business owners have prepared for their untimely demise. Many are shocked when a trusted partner dies, to find their new partners are his/her spouse or children. Today, more than ever, businesses are forced to take a serious look at their business plans and the continuation of that business in the event of death, disability or retirement.
Experience has shown the most successful business owners build a business that can either be sold or passed down as a family legacy to their heirs and beneficiaries. To assist in ensuring the orderly disposition of a business interest, the owners must have an appropriate agreement drawn up which will establish a market for the business in the event of death, disability or retirement. The agreement should establish a fair price for the business and the possible value for estate taxes. The plan should also provide enough cash liquidity for the owner’s obligations. All closely held businesses should have a succession plan.
If a plan is not in place, several things can occur:
- A business will be liquidated to pay outstanding debts and it may not receive its fair market value.
- The business will remain in the family. However, will the new leaders really want that position and are they qualified to run the business successfully?
- The business interest will be sold.
A succession plan that is properly structured can achieve the goals and objectives of the business owner. Here are some questions business owners should ask:
- Is there enough cash to meet debts, income needs and estate taxes?
- Will all intended heirs and beneficiaries receive the same financial considerations?
- Will there be a buyer for the business, and at what price?
- How much will it cost to replace the key owner or employee?
After asking these questions, it is important to understand the desired result of the succession plan. Once the objectives have been established, a plan can be designed. Succession plans usually fall into two main categories: buy-sell arrangements and key person insurance.
A buy-sell arrangement is simply an agreement in which one party agrees to buy – and the other agrees to sell – business interest in the case of a disability, retirement or death. The most common forms of buy-sell arrangements are entity purchase plans, also known as stock redemption plans. They are normally best to use with multiple partners.
The other form of buy-sell is known as a cross-purchase arrangement, which is commonly used with a small business having five or fewer owners.
Key person insurance is used by a corporation to insure the life or lives of key employees, which will provide the business with the resources to survive in case of disability, retirement or death.
In summary, all business owners should have a succession plan in place. Whether it is simple or complex, the plan should be designed to meet their desires and needs. Business owners should also assemble a team to provide the latest planning solutions available for their firm. The team quite often consists of an attorney, a CPA and a financial consultant. Having a viable plan in place will assist a company in the necessary transition to a new owner or the passing of that business as a legacy to the next generation.