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How Business Succession Planning Can Protect Business Owners

What if something happens to you and you can’t run your business anymore? Who will then take over the management of your business and will it work the way you want?

By creating a robust succession plan in your business, you can ensure a smoother development of your business.

Business succession planning, also known as business continuity planning, involves planning to continue the business after the business owner leaves. A clearly defined business succession plan defines what happens during events such as the owner’s retirement, death or disability.

A good succession plan in business usually includes, but is not limited to:

The wording of the goal, for example, who is authorized to own and manage the business;

Pension planning, disability planning and business real estate planning;

The wording of the process, for example, to whom and how shares should be transferred, and how the receiving party should finance the transfer;

Consider whether there are existing life insurance policies and investments to provide the means to facilitate the transfer of ownership. How else to fill in the gaps;

Analysis of shareholder agreements; And

Assessing the business environment and strategy, management opportunities and gaps, business structure.

Why should entrepreneurs think about planning continuity in business?

It became easier to transfer the business because the potential obstacles were foreseen and eliminated.

Income of the entrepreneur through insurance, for example, a permanent income for a disabled or seriously ill business owner or a source of income for the family of a deceased business owner.

Reduced risk of forced liquidation of business due to sudden death or permanent disability of business owner

Funding is needed to ensure that some parts of a good business succession plan work. Investments, domestic reserves and bank loans are common ways to finance a succession plan.

In general, however, insurance is preferable because it is the most efficient and cheapest solution compared to other options.

Life and disability insurance for each owner ensures that some financial risk is transferred to the insurance company in the event of a transfer from one of the owners. Proceeds are used to buy back a stake in the deceased owner’s business.

Homeowners can choose their preferred insurance package using one of two options: “cross-purchase” or “buying a legal entity.”

Cross-purchase agreement

In the mutual purchase agreement, the co-owners will buy and have a policy towards each other. When the owner dies, the proceeds from his policy are paid to the surviving owners, who will use the proceeds to purchase part of the outgoing owner’s business at a pre-agreed price.

However, this type of agreement has its limits. The important point is that in a business with a large number of co-owners (10 or more) for each owner it is impossible to adhere to a separate policy towards each other. The cost of each policy can vary due to the huge difference in age of the owners, leading to inequality.

In this case, the purchase and sale contract with a legal entity is often preferred.

Contract for the purchase and sale of a legal entity

In the contract of purchase and sale of a legal entity, the company itself acquires a single policy for each owner and becomes both the owner and beneficiary of the policy. When the owner dies, the company will use the proceeds from the policy to buy a stake in the deceased owner’s business. All costs are borne by the business, and capital is retained between the co-owners.

What happens without a succession plan in business?

Without an appropriate business succession plan, your business can have serious consequences in the event of an unforeseen death or permanent incapacity.

These scenarios can occur without a succession plan.

If the business is split between business owners, the remaining owners may fight for shares or a percentage of the outgoing business owner.

There may also be a potential dispute between sellers and business buyers. For example, a buyer may lobby for a lower price than the seller’s higher price.

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