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Business Succession Planning for the Entrepreneur

Mar 17th 2011 at 8:08 AM

In planning for business and economic challenges, succession, retirement, sale of a business, or the withdrawal of equity from a business, the entrepreneur should properly consider the question of how to extract or protect his/her equity in the business. This planning process begins by a careful examination of the issues faced by the entrepreneur, then consideration of the options available, and then the formulating of a step by step process of preparing legal documents, making any required changes in corporate or financial structure of the business, and a review and revision of your approach to the business.

Your Business is You

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A lot of what makes your business successful is you. You remain a key component of what is described as the “value” of your business. Clients, customers and staff consider “you” and “the business” the same thing.

The Scenarios

  • Your business is successful, or your business is finally turning around, or your business is going through a temporary tough time but you have confidence that things will change if you are creative, effective and apply yourself. There’s no time to think about planning for the future.
  • You’ve been in business for awhile but you have not yet pursued any significant long term planning, although you know you should. You have been busy and circumstances are changing, so you feel the time might not yet be right.
  • You have considered some long term planning, but most of it is still being worked out in your own thoughts and it has not been reduced to writing. No one but you knows the full picture.

Why You Need to Consider Succession Planning Now

  • You know you are not going to be leading the business charge forever. You may want to slow down or retire - you have paid your dues.
  • If you do not give key employees some equity in the business, they may either start their own business or go to work for a competitor who is prepared to give them equity and more opportunity.
  • Your children are taking a greater role in management and are wanting more responsibility and authority.
  • Or maybe your children are not involved with your business at all (except to the extent they share in the revenues generated by the business), and you need to consider who will take over the business when you retire.
  • You are healthy and you want to enjoy the money for which you have worked so hard while you still have your health and while your spouse still has his/her health.
  • You and your spouse are getting older and may have to deal with issues of failing health.
  • You would like to sell your business but are not sure how to “package” it and make it attractive enough for someone to buy at the price you believe is fair.

Family Considerations
Your spouse or children may not be familiar with the workings of your business or its inherent value (hidden or future) and they would be at the mercy of your partners, your employees or your competition if something happened to you.

In a family business, those family members who are actively involved in the business may want to continue to build it, while other family members who are not involved in the business may want to sell it in order to realize on its present value.

And if you have a child with special needs or a spouse or parent who needs care, their interests may not be best served by those surviving you or by leaving your estate in the hands of others without proper instructions.

Planning for the Unexpected
The bubble has burst in our economy - stocks are down, real estate prices have plummeted, interest rates are going up and creditors are nervous. Does your business plan consider these kinds of contingencies?

Do you know what the tax costs would be to your business or to your estate if you died tomorrow?

Your business may be healthy so long as you are healthy, but if you have no plan in place for sudden accident, illness or death, how would business decisions be made in such an event?

Liability Risks

  • Your core business is doing just fine, but some side investments you made in the past are not doing so well and now have the potential to threaten you with personal liability.
  • Your core business is starting to suffer and is threatening the nest egg you have patiently and carefully saved for your retirement.
  • You are insolvent, maybe bankrupt or on the eve of bankruptcy. Unexpectedly, a wealthy relative died and left you an inheritance. The inheritance was timely since it will now serve to pay off your bills and your creditors will be satisfied. It might have been better, however, to use the inheritance as a fresh start for your post bankruptcy/insolvency life.
  • Your child or your spouse is an entrepreneur, but things are not going so well. Your child/spouse is insolvent or in bankruptcy, and suddenly you die. Now your child’s/spouse’s creditors are satisfied. Unfortunately, your child’s/spouse’s bankruptcy had the effect of depleting their assets and ultimately your estate. Your child/spouse would have benefited more had your estate been structured in a way to offer them a head start or a fresh start.

Time to Consider a Plan
Take a moment to evaluate what might happen to your business, your estate and your family if either you or your business suffer a sudden set-back. Now is a good time to begin the process of addressing estate planning, asset protection and tax planning, risk management, and business succession planning.

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