Key Elements Of A Business Succession Plan

If employees are to be the successors, an Employee Stock Ownership Plan may, under the right circumstances, be an effective way to transfer a business interest. There are also potentially favorable income tax advantages to the seller when an ESOP is used.

Management. If the business is to succeed beyond the first generation of owners, an effective management team must be in place. Regardless of the goal of the succession plan, management will enable the business to continue operations. Having the team in place is an assurance to employees, as well as to current and future owners, of that continuity.

Valuation. Many methods for business valuation exist, and the goal of the succession plan may influence the method that is used. A method that results in a high valuation may be better for one set of goals; a method that results in a low valuation may better accomplish another set of goals.

We usually recommend at the inception of the buy-sell agreement, and periodically thereafter, that the business engage the services of a qualified appraisal firm to establish a value, especially if estate and gift taxes are a material consideration. It is critically important that the appraisal firm knows the objectives of the succession plan prior to the valuation work.

Funding. If a buy-sell agreement is implemented, the agreement must be funded to the fullest extent possible. Triggering events such as death and disability should be funded with appropriate amounts and types of insurance.

Other triggering events should be funded with a sinking fund account. Care should be exercised not to include the insurance proceeds in the valuation of the business.

Communication. Once the business succession plan is in place, the current owner(s) should communicate the basics of the succession plan to all affected parties, including family members (whether or not involved in the business) and key employees. This communication creates a sense of financial security among family members and employment security among key employees.

There is no such thing as a quick and easy succession plan that fits all situations. But every financial professional who works with business owners should help them to develop a succession plan that includes the elements of control, management, valuation and funding. Remember to communicate the plan to all concerned.

Ward B. Anderson, CLU, ChFC, a representative of MassMutual, is national president-elect of the Society of Financial Service Professionals. He is also president of Compensation Planning & Administration Systems, Inc., Denver, Colo., and a member of Rocky Mountain Financial Partners, LLC, also of Denver. You can e-mail him at [email protected].