Protecting Your Small Business To Provide for Your Family After You're Gone?

Protecting Your Small Business To Provide for Your Family After You're Gone

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Most business owners are hard at work growing their companies and neglect to plan for the day they must pass the business on to their families. A premature illness or death may leave the business and family without leadership. A business owner may have more than one child or can have children from different marriages. Families left without clear plans usually fight over control of the business. A business succession plan can make a difficult situation easier for your loved ones.

Many businesses are partnerships; their day to day operations are handled by more than one person. The death or incapacity of a key person in a business can have devastating consequences: Who will be in charge? Are the other partners in agreement with the deceased partner's replacement? If there is no replacement, how will the business compensate the deceased partner's family? Succession planning should be in place well in advance to avoid future difficult situations. These situations must be handled with knowledge and experience to avoid costly litigation and the destruction of lifelong friendships.

The business succession plan is a comprehensive process. The first step is to establish the business' value. This can be obtained through a CPA or a private agreement. Once the value is determined, the business purchases life insurance on all the partners to fund the succession plan. The insurance benefit will be used to buy out the deceased partner's share of the business.

There are two ways to arrange a business succession. The Cross-Purchase Agreement is structured so that each partner buys and owns a policy on each of the other partners in the business. Each partner functions both as owner and beneficiary on the same policy. The Entity-Purchase Agreement is less complicated. Here the business itself purchases one policy on each partner and becomes owner and beneficiary of the policy. Upon the death of any partner or owner, the business will use the policy proceeds to purchase the deceased person's share of the business.

While both ultimately serve the same purpose, they are used in different situations. The contracts must be drafted clearly and without any ambiguous terms to avoid future complications or delays. More importantly, the only way to make sure that things turn out the way you intend is to have an attorney alert you to all the consequences of your decisions. Your business succession plan should not be left to an insurance agent or your accountant. Remember this is more than a business plan; it's your family's future.

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