Business Practices

What is succession planning and why is it important?

Retirement Succession Planning

How business succession planning protects you as a business owner

Disclaimer: There is some gloomy content here!

Thinking about how your business would continue to operate if you were suddenly unable to contribute is difficult to think about. However it is important to know who can take responsibility in this event so your business to thrive without you; this is called business succession planning. It is a clearly structured business plan that determines what happens to the business in case of events such as retirement, death or disability of the owner.

What makes a good succession plan?

A good business succession plan usually includes, among other things:

  • The new company structure including who will be entitled to own and run the business.
  • An outline of how the shares are transferred.
  • Information about insurance policies and existing investments that can provide funds to facilitate the transfer of property.
  • Copies of the shareholder agreements.
  • Assessment of the environment, business strategy, management skills and weaknesses.

Why should entrepreneurs consider business succession planning?

  • The business can be transferred more easily as potential obstacles are anticipated and addressed.
  • Ensure that shares are transferred to the appropriate people.
  • Ensure that there is a continuous income for owners and family members.
  • Reduce the likelihood of compulsory liquidation due to a sudden death or permanent disability of the business owner.

Insurance

A good business succession often includes financing such as investments, internal reserves and bank loans. However, insurance is generally preferred as it is the most efficient and cost effective solution.

The life and disability insurance of each owner guarantees that a financial risk is transferred to an insurance company. The proceeds will be used to acquire the shares of the deceased owner.

Cross purchase agreement

In a cross-purchase contract, the co-owners buy and own a mutual policy. If an owner dies, the benefits of their policy will be paid out to the surviving owners who use the proceeds to buy the part of the business owned by the departing owner at a pre-agreed price.

This type of agreement has its limits however. For example it is impractical for a company with a large number of co-owners to follow separate policies for each owner. The cost of each policy may also vary due to age difference between the owners, which could be seen as unfair. In this scenario an agreement could assign a single person who becomes the beneficiary and who then subsequently distributes them to the other owners.

What happens without a company succession plan?

There may be serious consequences without a proper business succession plan.

There can be conflict among remaining owners as they jostle over who gets the various responsibilities. By making it clear upfront you remove this potential conflict.

There might be a view that the business is weaker in the event you have a permanent disability or serious illness. A succession plan ensures that remaining owners are able to quickly provide comfort to employees and customers to build trust quickly.

Income for your family can become cut off, leaving them without the support that they need at a time when they need it most.

Do not let the business you’ve built collapse if you’re not around anymore. Take care of a proper business succession plan to ensure it thrives and your family is well-prepared for the future.





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