Keeping The Dream Alive

older-black-businessmanJerry runs Regal Printing, a successful print shop (C-corporation), he started 25 years ago. He has two employees, but he and his wife are sole owners with all management and decision making responsibility.

Jerry and his wife, Elizabeth, pooled their savings to get the business off the ground and have spent their lives nurturing it. It is by far their largest asset. Their oldest daughter is very active in the business, but their other two children are too young. Will any of their three children run Regal Printing some day? Or perhaps one of their key people? That depends.

Ninety percent of the 21 million U.S. businesses are family owned. Yet only 30 percent of family run companies today succeed into the second generation, and only 15 percent survive into the third (Source: SBA.gov). Business continuation planning can be difficult for your clients, especially with all the day-to-day problems that need immediate attention. But, lack of planning can be devastating. Most likely the 30 percent of businesses that do make it, make it because their owner planned for the orderly transfer of the enterprise.

Jerry and Elizabeth’s situation is common. A family business is often the owner’s major asset. The death or disability of a business owner who is usually the key to the success of a business can seriously damage the business’ value. Good planning can substantially minimize these risks.

Let’s take a look at why some owners plan for business continuation while others do not, the methods and tools to transfer business interests, and how to begin developing a plan.

“Business continuation” planning simply means planning for the transfer of business ownership and management from the current owner to someone else. There are a number of good reasons why owners should plan for the transfer of their businesses, such as avoiding the business passing to under-qualified owners, protecting key employees or raising cash. However, most of the time the planning is done simply to “keep the dream alive” and ensure the business extends beyond the owner’s lifetime as in Jerry’s case. Few business owners work for a lifetime only to consciously decide to let their business dissolve when they’re no longer able to manage it.

Every business owner should consider having a buy-sell agreement to ensure the continuation of the business and to protect the owner and his or her family.However, owners frequently don’t know what they want to do, nor do they understand the various options open to them. Buy-sell agreements work no matter what form a business takes: sole proprietorship, partnership, limited liability corporation, C corporation, or S corporation.

Beyond taking that all-important first step and getting the agreement set up, having the dollars available to make the transfer happen is also key. Generally, the most convenient and thorough method of funding the buy-sell agreement is through life and disability income insurance. Buy-sell agreements funded with life insurance offer these benefits:

  1. Creation of an exit timeline
  2. Determination of a value for the business
  3. Liquidity to support the family
  4. Identification of a transferee

Clearly, a buy-sell agreement best protects owners and families if arrangements are made prior to death or disability. And, funding the buy-sell agreement so the dollars are there when needed is essential. There are a myriad of disability and life insurance solutions for this problem. It’s never too early to plan for the continuation of your business. To get started, ask yourself some general questions:

  •  Why do you want to plan for business continuation, and what do you want to accomplish?
  • When and how do you want to transfer your business?
  • Who are possible candidates to own your business?
  • What do you consider an acceptable value for your business?
  • What problems could arise in the continuation process?
  • Who is available to help you?

First and foremost, assess your business continuation situation carefully so your plan accomplishes your goals. A buy-sell agreement funded with life insurance or disability income insurance may offer some answers to keep the dream alive!

 

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SECURE THE FUTURE OF YOUR BUSINESS

iStock_000008233795Medium-man4-908x1024When it comes to your business, hoping for the best won’t ensure its future. Take Jack Stanton for example. Jack spent thirty years building a manufacturing giant, Stanton Solutions Corporation. However, due to the rigors of maintaining his company, he had little time for any personal financial and estate planning. Then, Jack died unexpectedly in a boating accident. All of a sudden, Stanton Solutions, a multi-million dollar manufacturing empire was facing an uncertain future caused by the loss of its owner and upper-most key executive.

What would happen to your business and your family should you become disabled or die unexpectedly? Do you have key employees for family members who could step in and run the company in your absence?

Business Continuation Basics

It is essential to the future of your business and your family to have a succession strategy in place. In order for your business to maintain continuity, you need to implement a succession strategy that coincides with your goals and objectives. Your strategy should be flexible enough to handle changes within the company and its related industry(ies). However, one of the keys to a succession strategy is determining who or whom your successor(s) will be.

Deciding on, and preparing a successor may require years to familiarize him or her with the finer points of the business. Thus, it is important to select a replacement as soon as possible in order to maximize the possibility of a successful transition. In smaller businesses, it is not uncommon for one or more family members to be at the top of the list of potential successors.

If you wish to pass your business on to future generations, you will need to make an honest assessment of the respective needs of your family and business, the qualifications of any interested family members, and whether the family and business would be best served by a continued relationship. Communication with family members is extremely important in order to better ascertain overall interest or concern.

You can prepare yourself by honestly evaluating and reflecting on the necessary components of a well-thought-out succession strategy. Here are some points that may require further elaboration:

• a thorough job description of each position, including details regarding areas of responsibility and delegation of duties;
• a management/organizational plan;
• Assuring the availability of cash to meet the demands of federal and/or state estate taxes;
• a list of potential successors to your ownership, taking every candidate’s job experience and academic background into consideration; and
• a mechanism to ensure extensive on-the-job training for the successor(s).

Other Considerations

A succession strategy may also include a buy-sell agreement funded by life insurance. More than likely, your successor may not have the cash, or the ability, to borrow at the time of successorship. Under such an agreement, the death benefit proceeds of the life insurance can be used to provide the cash necessary for a successor to purchase an owner’s share of stock in the event of his or her untimely death.

In addition, it may be prudent to explore how your unexpected disability could affect not only your plans for successorship, but also your financial well-being. Under a disability buyout arrangement, a disability buyout policy provides a successor with cash to purchase shares in the event of the owner’s untimely disability.

 

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