Builders and Contractors Exchange
Weekly Bulletin: 27 Sept 2004
Make Sure Your Business "Succeeds": Succession Planning For Small Businesses With Multiple Owners
By: Christopher Ambrosio
While dealing with day-to-day issues can consume most of a small business owner's time, it is crucial to reflect on long-term planning: What happens if one of the owners dies or becomes disabled? Tension and, in some cases, litigation can arise between the remaining owners and the personal representatives of the deceased or disabled owner. Planning ahead can help to minimize these risks. This is especially important for owners who are actively involved in the management and operation of the business.
A common solution is for all the current owners to have a mandatory buy/sell agreement in which the company or remaining owners are required to buy the deceased or disabled owner's interest at a predetermined price, either a fixed amount or mathematical formula, or at a price that is determined by a specified process (e.g. by one or more accountants providing a valuation of the business). The personal representatives of the deceased or disabled owner, or the disabled owner himself if he is mentally competent, are then required to sell on such terms. In the case of disability, it is important to define the point at which a person becomes "disabled," taking into account both physical and mental disability. Determining "disability" usually requires the judgment of one or more physicians.
Frequently, life and disability insurance are obtained in conjunction with the buy/sell agreement to fund the buyout in the event of death or disability. Insurance provides available funds for the buyout without imposing a significant financial liability on the company or remaining owners. This can be accomplished with a "cross-purchase" arrangement, where each owner obtains a policy on every other owner, or by an arrangement where the company owns all the policies.
To implement the above solutions, a shareholders' agreement (if the company is a corporation), an operating agreement (if the company is a limited liability company or "LLC"), or a partnership agreement (if the company is a partnership) must be drafted.
This article merely scratches the surface of the topic of business succession. In addition to the above issues, there are also estate planning and tax matters for each owner to consider. However, by planning ahead with professional financial and legal advisors, a business can ensure long-term "success."
Questions?
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.