For many successful business owners or partners, the thought of stepping down hasn’t crossed their minds, especially when retirement is still a long way off. The same is true for choosing the right person to take over.
That’s understandable, as growing a company’s brand, maintaining positive cash flow, and a stable balance sheet can consume much, if not all, of their time. However, creating a sound succession plan can be just as vital for the company’s future success.
Choosing a successor
When retirement beckons, the logical and comfortable solution for some Texas business owners may be to sell the company. However, many others are determined to see the fruit of their hard work live on and be successful well into the future.
Selecting a successor may be as easy as naming a family member to take over, or perhaps a long-time top-level manager. However, regardless of how many candidates they have, or who they are, it’s vital to assess their strengths and weaknesses for everyone’s well-being.
Value the business
When business owners or partners step down, or upon their death, a dollar value must be established for the company, or at least their share. This can be done through an appraisal by a CPA, or an arbitrary agreement among partners. For a publicly-traded company, the amount is typically determined by the stock’s market value.
Using life insurance for a transfer vehicle
Once a dollar value is established, life insurance policies are often bought for all business partners. If one partner dies before leaving the company, the death benefit can be used to buy out the deceased partner’s share and distributed equally among partners. There are two primary methods:
- Cross-purchase agreements: Owners buy a policy on each of the other partners, thus becoming an owner and beneficiary of the policy. When a partner dies, the policy is paid out to the remaining partners, who then use the proceeds to buy the deceased member’s share.
- Entity-purchase agreements: In this arrangement, the business buys a single policy for each partner, making it the owner and beneficiary. When a partner dies, the proceeds are used to purchase the deceased person’s share. These are more common when multiple partners exist, or there are significant age differences among partners, resulting in large disparities between policy costs.
Prepare for a smooth transition
It is never too early to plan for your business’s future, whether you are approaching retirement age, or to protect your family, your company and your workers in case of an untimely death. Working with an experienced business transaction attorney can help you ensure that a smooth transfer takes place whenever the time comes.