Passing the Business Down to... Who?

If you don't have business partners, you might not think you need a succession plan. You do. Here are some options.

Most business partners realize that they need to prepare for the worst: if one of he partners dies, becomes disabled, or simply wants out.

But what if you are the only owner? Most entrepreneurs in this situation don’t have a plan, because there is no natural successor. This is a recipe for disaster – for the business, its employees, and the owner’s family.

Don’t believe me? Consider Jack, a successful business owner who became a client of ours a few years ago. Jack and his family had done well with his business. But the company was a shadow of its former self. Several years earlier, some key people had mutinied and started their own firm. Key employees are often afflicted with entrepreneurial seizures, so this didn't seem that unusual. Until we discovered why it had happened.

At a company retreat, the wine and the conversation had flowed a little too freely. The key people asked Jack, who was 25 years their senior, what would happen to the company if something happened to him. Jack didn’t have a plan. He didn’t think he needed one. He said, "I suppose my kids would inherit it."

Okay, that’s bad. His children were in college at the time and had never worked a day in the business. Within six months, the key people had left, taking key clients with them. Not willing to start over, Jack effectively shuttered the business moved on.

It didn’t have to be that way. Here are three ways you can avoid becoming the next Jack:

1. Draw up a One-Way Buy/Sell Agreement. Usually, a buy/sell agreement spells out what will happen if one of the partners leaves a business. But you don’t need to have partners to have a buy/sell agreement. If you have key managers that can run the business in your absence, set up an agreement that lets them purchase the company from your family if you die or become permanently disabled. A life insurance or disability policy can and should be used to fund the purchase. This provides peace of mind to your family and to the people who work for you.

2. Stay Bonus Plan – If you’re thinking that the company will be sold after you die, then consider a stay bonus for your key employees. The stay bonus is a written agreement between a key employee and the company that he or she will be paid a substantial bonus for staying on beyond the owner’s death or disability for a period of time. This allows the company to remain profitable and be sold or transitioned without a fire sale. In the absence of this agreement, your best people will be out looking for work when they are most needed to keep the business going. Once again, a life insurance policy on the life of the owner provides the money to pay the bonuses.

3. A Contingency Plan. The roles and responsibilities of the key employees need to be clearly spelled out in the even that you die unexpectedly. A healthy company has a contingency plan that involves leadership succession, defined roles, and an advisory team for the new leaders to lean on during the transition.

Don’t be afraid to share your plans with your key executives. They will feel a lot better about their company knowing you have a plan. You’ll sleep better knowing that your family will be cared for and that the people who make their living from your company will still have a place to work.

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