Business Succession Planning: What You Need To Know
Retirement is a lifelong goal for all, but it is not uncommon for some to reach that goal later than anticipated, if at all, especially for business owners. At some point in a small business owner’s life, a transfer of ownership is necessary, whether it is due to retirement, illness, or death of the owner. According to the Small Business Administration, less than one third of family owned businesses endure a successful transfer to the second generation, about one tenth survive past the third generation, and only three out of every 100 small businesses are successfully transferred to the fourth generation. Retirement planning can be multifaceted, but becomes even more complex when one’s business is at stake as well. By creating an effective succession plan, one can strategize with confidence and have a plan when one retires, or regrettably become ill or pass away.
Understandably, to create and grow a business requires principal, and typically dividends and excess capital are reinvested into the business to either improve or expand. As such, retirement plans may not be properly funded or structured, if at all. By succession planning, small businesses and their family members will benefit, especially if the planning is funded by a life insurance policy. In the event of an illness, disability, impairment, or death, family members or the businesses successors may be lost as to how to fund the business in the future. Using a life insurance policy as an “exit strategy” may be the most lucrative and productive way for a business owner to leave the business, whether foreseen or not. There are many benefits to properly structuring a succession plan for one’s business through a life insurance policy, including providing cash for a partner buyout in the unfortunate case of chronic illness, or access to cash at a predetermined age if illness or death does not occur. Additionally, if a business owner passes away, the life insurance can be used to buy out the deceased business partner’s share and continue the business operations or cover other expenses.
Before considering any “exit strategy”, there are negotiations that must be taken into account to ensure the needs of the business owner are met, such as who the owner wants to transition the business to, how to fund indispensable employees who contribute to the businesses success, when you would like to exit the business, and how much your prospective replacement would need to buy you out. In addition, leveraging life insurance with certain riders can substantially help address retirement, chronic illness, or the death of a business owner.
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