Page 1

Why a well thought-out business succession plan is necessary to ensure the survival of your business

Raymond J. German

www.GermanLawGroup.com

@RayGermanLtd


If you are a successful business owner then you have undoubtedly put in thousands of hours and a significant amount of your own money into making the business a success. What happens to your business though if something happens to you? Whether your business is a sole proprietorship or a partnership, a well though-out business succession plan is necessary to ensure the survival of your business. Of course only you and your estate planning attorney can create your own individual business succession plan; however, a basic understanding of the subject matter is a great place for you to start if you have yet to complete a plan.

Why Do I Need a Succession Plan? To understand why you need a business succession plan, consider what would happen without one under either of these scenarios. 1. You and your partner Joe have a successful business formed by a formal partnership agreement. You are both young and the thought of either one dying is not something you worry about; however, Joe is unexpectedly killed in a tragic car accident. Joe left behind a Last Will and Testament that gave everything to his young wife Sally. Legally, Sally now owns Joe’s share in your business yet Sally knows nothing about the business and has no interest in learning. Since you invested your life savings in the business, you don’t have the cash to buy out Joe’s interest in the business.

Whether your business is a sole proprietorship or a partnership, a well thoughout business succession plan is necessary to ensure the survival of your business. ●

You own a successful sole proprietorship and have hope that one day your children will take over the family business. Although you have discussed the possibility with all three of your children, a legal succession plan has never been A tragic accident leaveswww.GermanLawGroup.com you Raymondcreated. J. German

2.

2


created. A tragic accident leaves you incapacitated and unable to run your business. Legally, none of your children have the authority to run the business either and it could take months to go through the court system to get the authority after the fact. Without a business succession plan, your business would essentially come to a grinding halt and might never recover.

Deciding on a Successor Once you have realized the need for a business succession plan, the first step is to decide who will be your successor. The legal structure of your business is important when making this decision. For example, if your business is a partnership, then you will likely want to consider your partners first. On the other hand, if your business is a sole proprietorship, you may decide to leave it to a family member, assistant in the business, or sell the business outright upon your death. Your choice of successor will determine how to legally transfer your interest.

The legal structure of your business is important when deciding who will be your successor. ●

But first, some notes about choosing a family member as successor. While many business owners dream of passing on a business to the next generation, it is critical to ask three important questions before making that choice. First, does your intended family member actually want the business? Second, is he/she capable of running the business? Finally, how much family conflict will your choice cause?

Gifting the Business in Your Last Will and Testament Your interest in a business, whether it be a sole proprietorship, partnership, or corporation, is an estate asset. As such, it may be able to be gifted to someone in your will; however, there are numerous reasons why

Raymond J. German

www.GermanLawGroup.com

3


in your will; however, there are numerous reasons why this option may be the least desirable option, including: Your will must go through probate which can take months, even years to terminate Business assets could be held up in probate Gifting the business in your will is likely to expose the business to significant tax consequences Your will limits your ability to provide guidance or direction to your intended beneficiary.

Buy-Sell Agreements A much more popular method for transferring an interest in a business is to use a buy-sell agreement. There are variations to the theme, but the basic idea in a buy-sell agreement is that you reach an agreement with someone to purchase your interest in the business should a triggering event occur. The agreement is typically made with one or more partners in a partnership or with the business itself. The triggering event is usually death, incapacity or retirement. The purchase price can be determined at the time of the agreement or can be determined at the time of sale based on market conditions. A buy-sell agreement works like this: Option A -- You own one-third of a business under a partnership agreement. You enter into a buy-sell agreement with the two other partners. The agreement calls for them to purchase your one-third of the business if you die, become incapacitated, or reach the age of 70. Two years later you die. The partners are immediately required to purchase your interest in the business and divide it equally among them with the funds from the sale becoming part of your estate

Raymond J. German

Creating a Buy-Sell agreement can help you achieve tax advantages and control with respect to your family business. Equally important is the peace of mind you'll gain when you know your children will be well provided for and your legacy will be passed on in a highly structured and cost-efficient way. ●

www.GermanLawGroup.com

4


from the sale becoming part of your estate assets.

Recommended Book

Option B – Same facts as above except that the business itself agrees to purchase your interest in the business. You become incapacitated five years later at which time the business must purchase your interest and then may divide the interest internally. Proceeds will also become part of your estate.

Life Insurance Life insurance is an estate planning tool that is often used in conjunction with a buy-sell agreement. Proceeds from a life insurance policy can supply the necessary funds to complete the purchase of your interest in the business. In the previous scenarios, a life insurance policy would work like this:

Traditionally, estate planning has had a fairly narrow scope. The focus has been on what happens at the time of your death, and the only issues typically addressed have been: Who gets what you own When and how they get it

Option A – All partners purchase a life insurance policy and function as both the policy holder and the beneficiary of the policy. The other partners are named as the insureds in the policy. If you die, the other partners will receive proceeds sufficient to purchase your share in the business. Option B – This works better when there are numerous partners. The business itself purchases a life insurance policy insuring each of the partners. The business then owns the policy and is the beneficiary. If you die, the business will receive the proceeds and then fulfill the buy-sell agreement with partners. As you can see, a business succession plan can be rather simple or quite elaborate depending on the complexity of the business and the goals of the owners. .

Raymond J. German

How these transfers can be achieved at the lowest possible cost While this approach is a great start, it does not take into account the real-life issues and concerns faced by today's families. In fact, it completely ignores the very element of wealth that many of us hold most dear: our non-financial legacy. Legacy Wealth Planning for Minnesota and North Dakota Families not only explores the shortcomings of traditional estate planning and identifies the more complex needs of modern families, it also explains a holistic new process called Legacy Wealth Planning If you want to learn how to create a true and lasting legacy within your family, regardless of the size of your estate, look no further than this book! Get Your Copy Here

www.GermanLawGroup.com

5


The important thing to understand is that absent a business succession plan your business could quickly flounder and eventually fail.

About the Author

References The CPA Journal, Understanding Buy-Sell Agreements Entrepreneur, Smart Succession Planning Strategies Investopedia, How to Create a Business Succession Plan As an attorney in Minnesota and North Dakota, Raymond J. German provides a wide range of estate planning and title services to his clients, with a primary focus on helping them provide for the security of their loved ones, reduce estate taxes and avoid or at least minimize the costs and delays of probate, all with a well-crafted estate plan. Mr. German defines the mission statement for Raymond J. German, LTD. Law Firm as "Helping one family at a time pass on values, beliefs and finances, that can be shared for generations to come." Mr. German is well aware of the growing importance of estate planning and dedicates himself to informing the public of the need for careful attention to their specific situations. He is a frequent speaker on a variety of estate planning topics, regularly presenting educational seminars for the public as well as private groups. GRAND FORKS 2650 32nd Avenue South Suite O Grand Forks, ND 58201 FERTILE 105 North Mill Street P.O. Box 127 Fertile, MN 56540

Raymond J. German

www.GermanLawGroup.com

6

Business Succession Planning  

Whether your business is a sole proprietorship or a partnership, a well though-out business succession plan is necessary to ensure the survi...

Read more
Read more
Similar to
Popular now
Just for you