Business Succession Planning Should be a Priority for Business Owners and Professionals

Business Succession Planning Should be a Priority for Business Owners and Professionals

There is one aspect of running a business that most business owners often overlook; succession planning.  I am often reminded of the vary scary scary fact that,

Approximately 90 percent of U.S. businesses are family firms, ranging in size from small “mom-n-pop” businesses to the likes of Walmart, Ford, Mars and Marriott.

Family businesses are also more successful than non-family businesses, with an annual return on assets that’s 6.65 percent higher than the annual return on assets of non-family firms.

Unfortunately, only a little more than 30 percent of family businesses survive into the second generation, even though 80 percent would like to keep the business in the family. By the third generation, only 12 percent of family businesses will still be viable, shrinking to 3 percent at the fourth generation and beyond.

These stats, provided by Mr. Leibell in an Article titled,  Succession Planning, (March Trusts and Estates Magazine – Subscription Required) should be a wake up call to all those business owners.

What is a Buy-Sell Agreement?

Ignoring the specifics and complexities of the types of buy-sells Wikipedia defines a buy sell as,

a binding agreement between co-owners of a business that governs what happens if a co-owner dies or is otherwise forced to leave the business, or chooses to leave the business.It may be thought of as a sort of premarital agreement between business partners/shareholders or is sometimes called a “business will”.

When I am explaining a buy sell agreement to a financial planner or client I usually explain that it is a contract to proactively and preemptively take care of:

  • Death
  • Disability
  • Departure
  • Divorce
  • Deadlock
  • Disagreement Among Owners
  • Default
  • Determination of Value
  • Disaster
  • Dissolution

Why do Professionals have Additional Complications?

It seems like things may be changing soon but as of the date of this post, in the State of New York non-professionals are legally unable to own some professional companies.  For example a non-lawyer is legally prevented from owning a law firm.

This obviously presents additional problems with Business succession planning which should be considered.

Funding a Buy Sell

You have no idea how many times I will read a buy-sell that has been in place for years and covers most if not all the situations above, but is unfunded.  What do I mean by unfunded?

Lets say we are talking about death, and the document says that upon death of one of the partners/shareholders the surviving partner will buy the shares from the estate of the deceased shareholder for 20% down and 80% note…my first 2 questions are always:

  1. Does the business have enough cash to part with a 20% down payment? If not do they have insurance?
  2. Can the business operate with an amortized payment of 80%? If not, do they  have insurance to increase the down payment?

A Buy-Sell can be funded with either a sinking fund (think of a super emergency fund) or life insurance.

 

The type and logistics should be secondary to the idea that one needs to prepare for Death, Disability, Dissolution, etc., and it should be done prior to the occurance of those events. 

Do you have a Buy-Sell?

13 Responses to Business Succession Planning Should be a Priority for Business Owners and Professionals

  1. Interesting post… at first, I thought this may not apply to me, considering I don’t own a business. And then I got thinking… actually, I do… although it is in its infancy. I have a website, a newsletter, etc. that has value… increasing value I hope. Perhaps someday, I’ll have to consider this post as it applies to this “family business.”

  2. Good post, and it’s a topic that many people like to avoid because they don’t want to think about not being around or being unable to continue! We all know death and taxes are inevitable, as the saying goes. So, we ought to plan accordingly, right? We owe it to ourselves and the next generation.

    • You’d be surprised how many people take the attitude that they are leaving a ton of money so let everyone just figure it out

  3. Interesting article, I’d not heard of a buy-sell agreement. I concur about the 2nd generation curse. Not many small businesses that we use as suppliers have any good plans for the business to carry on.

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