The small business market represents an enormous marketing opportunity for advisors. Entrepreneurs who develop their own businesses are often so wrapped up in day-to-day management that they have not taken the time to meet with a financial advisor to discuss estate, retirement and executive benefit planning. In fact, they may not have even taken the time out of their schedules to determine who will take over their businesses when they pass away.
Meanwhile, the financial advisors to these entrepreneurs–including CPAs, attorneys and life underwriters–likely have not scheduled appointments to discuss the need for proper business succession planning because their involvement in this area is peripheral or they lack the expertise to provide comprehensive advice. Failure to address business succession planning not only could result in the advisor losing a huge market with unlimited sales potential, but also in the client potentially losing a valuable asset to transfer to family members.
A large percentage of job creation in the U.S. stems from the small business community, which is growing exponentially due to numerous socioeconomic factors, including corporate downsizings, the scarcity of replacement positions for experienced workers, and growth in the technology industry. Many Americans are finding this an opportune time to establish their own enterprises. However, small business owners face many challenges in developing successful businesses. Among them: how to increase revenues, contain costs, staff adequately, meet financing obligations and modernize, to name a few.
In addition, they must determine whether the business can provide enough income to support them and their families through retirement. These many considerations can severely limit the time entrepreneurs have to think about the future of their businesses upon their death, leaving this an issue that financial advisors must address and work with their clients to resolve.
Quite often, a business owner will die before a business succession plan has been completed. As a result, the business is handed down to a surviving spouse and/or child who had no experience in running the business while the owner was alive and possesses little or no interest in continuing to run it after the owner has passed away.
Complicating the situation further is the estate's inability to liquidate its interest in the business. As a result, the estate and the surviving family members must dig into their own pockets to cover estate taxes and other settlement costs. The surviving spouse or family members are therefore burdened with a business to manage, taxes to pay, and an uncertain financial future, coupled with the loss of a loved one.
A formal business succession plan can effectively address these issues by: (1) outlining and implementing the objectives of the business owner; (2) creating a vehicle that will provide income to a surviving spouse; and (3) effectively transferring ownership to those family members with the experience and desire to continue running the business. Ultimately, the plan will accomplish the goals of the business founder while resolving issues inherent in the succession of a family business.
Typically, the business succession plan is designed as a cross-purchase buy/sell agreement between two business owners. As part of the cross-purchase arrangement, the owners enter into a contract for the purchase and sale of their respective interests. Normally, this agreement is binding and obligates all parties to either buy or sell their interests in the event of the death of a named party.
