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February 2012 Tip of the Month (1 of 2)

Set Up a Succession Plan for Your Closely Held Business
(and, yes, that even includes professionals like a CPA or law firm)

If you are the owner of a closely held business, how wise it is to prepare a long-term succession plan to ensure an easy transition to the next generation of owners. A plan can even prevent the company's destruction if one owner retires, becomes disabled, is terminated or dies. If ownership changes or the owners split because of a disagreement without having a succession plan in place, the viability of the business can be seriously damaged.

Here are some steps to follow in setting up a succession plan for your business:

  • Obtain and periodically update a business valuation. This sets the company's worth so that the owners know their stock's value in a transfer. The value estimate can vary over time and should be updated regularly to account for changes in company size and profitability.
  • Buy life insurance to cover the owners. Base the amount of coverage on key owners on the value of their stock, providing for proceeds to fund share purchases. Creating a partnership among the owners to receive the life insurance benefits if any of them dies can help owners avoid taxes on the proceeds. In addition, deceased shareholders' estates will be paid in cash, thus eliminating their need to rely on the continued prosperity of the corporation. Another advantage of using life insurance is that the enterprise's investment in the cash value of an ordinary life policy is a business asset. Also talk to the insurance professional about "disability buy-out" insurance.
  • Set up buy-sell agreements. Owners of the company need to agree to buy back shares of any owner who dies or leaves, which will enable them to prevent outsiders from buying the company's stock.
  • Involve the next generation. Bring family members, employees or other future owners into the succession process early by selling them shares and preparing them for management.

Taking these steps will go a long way toward ensuring that a closely held business passes smoothly from generation to generation, and that the business remains stable and viable for years to come.

As we mentioned in our last email alert, Marty Abo, was asked to "step up to the plate" as a director for The Exit Planning Exchange of Philadelphia (XPX). XPX is dedicated to helping entrepreneurs prepare for an informed, organized and financially rewarding exit from their company. XPX's members are seasoned advisors who understand the value to an owner of having a team of advisors to support the exit process. Member specialties include law, banking, accounting, wealth management, investment bankers and business brokers, merger and acquisition professionals, insurance, business valuation, and business consultation. XPX's purpose is to help advisors gain thought leader training about the exit process, learn about the role of other disciplines and come together to form exit teams to better support their owner clients to achieve a successful exit from their businesses. Anyone interested in the organization should feel free to reach out to Marty.