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Succession Planning - How to Divorce or Die or Retire with Dignity (and a little money)

Recession businessImage by maistora via Flickr

Does your business have a viable business succession plan? Ask yourself the following question.

Would your business survive if you (or your partner):

-   got divorced? got married (to a Yoko [1])?
-   died?
-   won the lottery?
-   got sick?
-   wanted to retire?
-   was offered a fabulous job . . . in Belgium?
-   got in a big fight with the others?

Do you want the business to survive all of those scenarios?

Are you and your business partner(s) in the honeymoon stage? Now is the time to make a plan. Are you going through the pain of growth or recession? Now is the time to make a plan. Are you too small to break up? Now is the time to make a plan. Everyone knows a business that has suffered the Yoko effect. You have the power to prevent it from happening to your business. Having a written plan for death, incapacitation, divorce, retirement and sale dramatically reduces future hassles.

Your accountant, tax advisor, financial planner and lawyer can help you implement your plan. Before meeting with them, you need to address the following issues:

Business Priorities

1)   Company structure (management and ownership). To avoid an Earnhardt-like struggle for control, you must make decisions before the company changes hands. Is it important that your oldest run the company? Is it important that your spouse get profits from the company? Do you want your spouse to have a vote in removing your oldest child as CEO?

a.    Voters

b.   Owners (including limitations on ability to sell)

2)   Evaluation of the business. (With the agreement of all owners, shares may be evaluated differently based on circumstance.)

a.    If you are leaving the business, how your shares for sale should be evaluated?

b.   If your estate must sell your shares to the remaining investors, how will shares be evaluated?

3)   Structure of buy-sell agreements.

a.    Amount of time to make payment.

b.   Does the company maintain a life insurance policy that pays for buy-sell at death?

4)   Intangibles. For example, agreement that the logo will stay the same for a period of years, that the company will not engage in the production of rubber vomit, et cetera.

5)   Other property. For example, ownership of intellectual property that is part of the business, ownership of the desk, use of the likeness of your dog (who has served as company mascot), et cetera. (or use of the No. 8 for the Earnhardt family).

6)   Tax consequences of each of your decisions.

You may wish to specify bonuses to current employees for performance or at buy out. You may wish to write severance packages to be offered at the sale of the company.  You may wish to set out a retirement package for partners as they age.

Once you decide how you think things should go, talk with everyone involved:

Your anticipated successor(s) -  If your anticipated successor has plans to pursue a Broadway musical career, you may need to make other plans. On the other hand, your successor may admit some issues with the buy-sell plan and offer tips to make the transition easier. Finally, a named successor may simply work harder for the business.

Your spouse and other heirs - Your verbalized wishes added to the written plan may head off some fights down the line and may provide the correct tone to your wishes.

Your business attorney – You must determine if you currently have the correct business structure before you put your wishes into a workable business succession plan. (FARMERS read this twice. Farm succession planning is another bale of hay altogether).

Your personal attorney – Your attorney can reconcile your personal estate plan with your business succession plan.

Your insurance agent– Your agent can help you determine how life and disability insurance policies work with your succession plan.

Your tax advisor– Each of your succession plan components may have tax implications.

Even a simple succession plan is far better than no succession plan. Failure to get a plan in place is compounding headaches for delivery when you can afford them the least.


[1] I acknowledge the unfairness to Yoko who I believe was an inspiration not a detriment.

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