Succession Planning: The role of insurance
By Susanna Stuart
Do you own a small business, or work in one? What would happen to that business if the key person or the owner were to retire, or suffer sickness or an accident? Would the business survive? If the owners of a business have no clear plan for any of these eventualities, the danger is that after spending years to build up a valuable business - an asset of real value - the enterprise may simply be left to collapse, or be sold at a “fire-sale” price.
Small businesses can be vulnerable, and if you’re working in one then we have two words for you: Succession Planning.
Succession planning is about working out a profitable, fair, exit strategy or a “plan B” if the owner or key person moves on or dies.
In the case of death, life insurance enables any surviving business partners and shareholders to receive money to buy out the share of the business from the deceased’s estate. The enterprise can then continue. This is especially vital if the surviving parties do not have the capital or ready money, or are not in a position to borrow. In this way, the surviving parties can also control who takes over the shares in the company – they may not want to be in business with the deceased’s spouse for instance, or a buyer.
Capital may also be needed to find a replacement for the deceased if he or she is the key person in the business, or to pay out any business partners who might wish to move on.
An integral part to having a good succession plan is to establish appropriate structures and clear documentation. For example, the succession could benefit from the formation of a trust or company entity prior to the transition, and a will and memorandum of wishes from the existing owner (or owners) will give clear guidance. Are these in place?
A second aspect of succession planning is to establish a clear means of valuing the business at the time of death of a business partner, or transfer of ownership. By having an agreed formula, all parties can proceed without delay and dispute. A smooth transition is a significant key to the ongoing survival of the enterprise. The new owner will already have plenty of other things on their plate, and the family of the deceased is unlikely to want the anguish of a legal dispute.
Get a succession plan in place. It gives everybody more certainty, and protects the value of the business.
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