Creating a succession plan for your business
For business owners or CEOs nearing retirement in Virginia, having a succession plan is vital to the continued success of their company. However, crafting a plan sooner rather than later can be beneficial even for owners who are years away from stepping down.
There are many factors to consider when deciding whether a succession plan is necessary. Sometimes, the best and easiest choice is to sell the business. However, many owners want to ensure that their company continues long after they are gone.
Three reasons to have a succession plan
Having a sound succession plan is beneficial for owners and partners because:
- Determining a business’s value sets an agreed-upon price for the business or the partner’s share and eliminates the need to set the value after death
- Benefits paying for the deceased member’s share of the business are available immediately and can prevent cash flow problems or the threat of an external takeover
- A succession plan helps ensure a timely settlement of the deceased person’s estate
Crucial steps in forming a sound plan
Three of the most critical decisions in establishing a succession plan include:
Choosing a successor: This may be a family member or a business partner after considering their strengths and weaknesses. Some partners may decide to sell their part of the business in a simple buy-sell agreement.
Valuing the business: When owners leave their business, either willingly or in death, a dollar amount must be determined. The value can be set through an appraisal by a certified public accountant (CPA) or an arbitrary agreement by all partners. For publicly-traded companies, the amount can be determined by the current value of the owner’s stock.
Life insurance: Once a business’s value is set, life insurance can be purchased on all business partners. In the event of a death, the benefit will be used to buy out the deceased partner’s share of the business.
Seek legal advice when forming a succession plan
Creating a proper succession plan for a business is vital to ensuring its future success, avoiding conflicts and giving you peace of mind long before you plan to retire. Succession plans can be complicated, especially when multiple partners are involved. An experienced business law attorney here in Virginia can advise you of the options that exist and work for a smooth and fair transition.