Business Succession Planning
If you own part of a privately held business and one of the other owners retires, sells his or her interest in the business, becomes disabled or dies, the business could be put into serious danger. Likewise, if you’re the one who leaves the business, you could place the business in jeopardy and face personal financial difficulties. A lack of business succession planning can lead to ownership disputes, battles for control, lengthy and expensive litigation, a variety of tax problems, and even dissolution of the business.
Effective business succession planning requires realistic introspection, communication, hard (often emotional) choices, foresight, and accurate assessment of the character and judgment of others. Ideally the plan is a written one that everyone involved understands and supports.
When it comes to succession planning, there are two specific elements that are essential to your business plan.
- A legal agreement; and
- Sufficient funding to continue your business
When considering technical alternatives for the succession plan, keep in mind that many alternatives can be combined to achieve the desired results:
- Management buy-out – an excellent way to keep the business independent and insure that it will continue operating. Implementation can take a variety of forms, the most common include a buy-sell agreement and stock options.
- Selling to the employees – a partial sale to an Employee Stock Ownership Plan can make management buy-outs easier. The Employee Stock Ownership Plan can purchase any amount of company stock on highly preferential terms. The effect is to reduce the total cost of the stock purchase, while retaining closely-held control among the primary shareholders.
- Selling to an outsider – selling to someone outside the business or family means the new owner may change or close it, but sometimes a “strategic buyer,” a competitor or related business, can offer the highest price. The business could be of greater value to the new owner if she or she takes the customer list, product name and sells the other assets.
- Liquidation – is not usually considered an alternative in succession planning because the business ceases operation. Thus no one succeeds the owner in running the business.
NOTE: Investment products offered through Enterprise Bank & Trust are:
- NOT FDIC insured
- NOT guaranteed by Enterprise Bank & Trust or any of its affiliates
- Subject to investment risk and may lose value