 The Four "P's" of a Successful Succession Strategy
Written by Randall M. Schulz, CPA
Succession planning should be a part of every company's strategic plan. How will the company develop and nurture its human capital? How will you assure a continuing sequence of qualified people to move up and take over when the current generation of managers and key people retire, move on, or become disabled or suffer an untimely death? How will you be able to plan for the future of the company without some assurance that the key posts will be filled with qualified, talented people to carry on and excel? What is involved in a successful succession strategy? First and foremost you need to: educate the "future generation" in the area of business knowledge and corporate governance; create buy-sell agreements; implement employment contracts and non-compete agreements; and consider purchasing key man insurance. These are just a handful of the myriad of issues you should consider when discussing succession planning. This article focuses on buy-sell agreements and their importance in the overall succession planning process. A buy-sell agreement is a contract between the owners of a business and/ or the future owners of a business. The agreement controls who can buy a departing owner's share of the business. It also controls how the price will be determined and ultimately paid. A properly structured agreement can significantly reduce potential problems in the transition of ownership of an entity. It can also provide security and comfort to the spouse/family members of the deceased or disabled shareholder. It can also eliminate or reduce issues if a shareholder encounters a divorce. A buy-sell agreement allows the seller(s) to achieve two key objectives. One, it prevents you and your business partners from transferring shares to unwanted owners, and secondly it provides a mechanism for each owner to value and sell his/ her business interest in the event of retirement, death, or disability. When thinking about succession planning, have a defined strategy in place. Make sure appropriate financing is available and resources are in place to carry out the deal. Be proactive with the future of your business and draft a buy-sell agreement before you need it. Get an experienced business law attorney involved to write the agreement and properly document the important details that need to be documented.
Be prepared, be proactive. Don't wait until disaster hits to think about future planning, at that point it is too late. Customize the agreements to fit your unique needs. No two situations are ever alike. Draft an agreement to allow you to think through the best strategic plan for your business and to create a process for a smooth transition between owners. Consider the different scenarios - existing owners, future owners, and family members not involved in the business. It is critical to choose the most appropriate funding source. Life and disability insurance policies can provide liquidity to finance the buy-sell agreement and successfully protect your family and your business in the future. Depending on your situation, it may be possible to structure the ownership of policies so that the proceeds are not subject to federal estate tax. Consult your tax advisor to aid you in structuring the plan. Ask your attorney to ensure the buy-sell agreement follows the economy in its formula valuation and documents the key elements of a buy-sell agreement. Uncertain economic times create an opportunity to transfer businesses to family members at reduced sales prices if the buy-sell agreement contains a market value formula valuation computation. So you ask, what are the four "P's" of a successful succession strategy? Planning, Prevention, Performance, and Position. Act now!
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