Taking a Holistic Approach Business Succession Planning

07/14/2022 Written by: Lorrie Baldevia

Most business owners spend a great deal of time building a business and very little time thinking about an exit strategy. Detailed planning is needed to ensure a smooth, seamless transition, and because there are multiple aspects that affect a transfer, having a solid business succession plan in place is key.

Failure to have a business plan in place or a poorly executed exit strategy can negatively impact the value of the business and could cause a fire sale. This process can hurt a spouse or children, create discord with business partners, create uncertainty for employees, and hurt vendors and the community in which the business is established.

There are four key elements of a successful plan:

    • Identifying the next generation of owners
    • Establishing a strong management team
    • Undertaking a regular valuation exercise
    • Creating a comprehensive estate plan

Identifying the next generation of owners

    • Having a clear vision of how the business will operate and who will lead the organization in the future is important to effectively transition. If business is kept in the family, complex issues around fairness and equity should be discussed to avoid conflict between members working in the business and those that are not involved. Alternatively, if the business is transitioned to employees, ensuring that employees have sufficient cash to buy out the business owner is a key factor that needs to be addressed. A sale to a third party, including a competitor, partner, or financial entity is also a viable option that should be considered.

Establish a strong management team

    • Having a strong management team that understands the day-to-day operations of the company is imperative for any successful business to thrive, especially if a business owner is seeking transition. Having a dedicated management team in place is one of the factors that will be used to value the business. Knowing that the management team will stay after the transition is equally important when valuing a business.

Know your business value

    • Understanding how much your business is valued is an important step in your transition strategy and should not be delayed until the time of sale. A business owner may decide upon a certain multiple of revenue to create a dynamic valuation metric. Industry trade associations may be a source of information in making that determination. Additionally, the valuation should be regularly reviewed.

Having a comprehensive estate planning

    • Estate planning that maximizes growth and minimizes taxes should be top of mind for business owners. Surprisingly, some business owners may not think of themselves as wealthy. This may be particularly true if they have been focused on building their business that they haven’t paid attention to their wealth status. If, as a result, no estate planning occurs, the wealth passed on to the next generation can be severely diminished due to taxation and costs associated with transferring assets to heirs. 

So, when should business succession planning start?

In a perfect world, business owners should be thinking about getting out the day they get in. Unfortunately, many business owners don’t start thinking about an exit strategy until they want to get out. At a minimum, a business owner should start planning for an exit three to five years before the planned sale date.

Once a business owner understands the need for a transition plan, a strategic approach that integrates executive retention, succession funding, and estate planning tools is essential. Two ways to achieve these outcomes are with executive benefits and life insurance.

Executive Benefits

    • A strong executive benefits program is a persuasive retention tool. Deferred compensation plans, Section 162 bonus plans, split-dollar life insurance policies, and disability insurance all provide incentives for key executives to stay with the firm after the founder has left. These benefits take on added importance if the exiting owner will not be available after their exit, whether by choice or by circumstance.

Life Insurance

    • Life insurance is a highly flexible solution that can be used in a myriad of ways ranging from funding the purchase of a business, to helping an exiting owner fund retirement, pay estate taxes, provide a death benefit for an owner’s family, or fund a charitable donation upon death. As a business owner ages, the uses for life insurance can evolve. Additionally, unless a business owner is an ultra-high net worth individual, and doesn’t need to be concerned about liquidity, life insurance can be the ultimate liquidity tool.


Take the next step now…

Business owners spend a tremendous amount of time building a business and don’t often plan for transition. To ensure that they have sufficient funds for retirement and estate planning needs, they need to start now, not later. Most importantly, because of the complexities of succession planning and the need to have multiple advisors assisting with finance, tax, legal, and insurance issues, it is important to work with experienced professionals. An AssuredPartners professional can work with you and your advisors to provide the clarity and solutions needed to ensure your legacy lives on. Don’t wait until it’s too late,  contact us today to get started implementing these plans for your exit strategy.

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