In my experience, around 70% of small businesses do not have simple agreements in place. Far too often people go into business with a friend with only a verbal agreement in place. Similarly, in the case of family business, they believe their son or daughter will take over. But what happens if things change? Ask yourself:
- If your business partner died, would you want their spouse as your new partner?
- Does your son or daughter really want to take over the business, and are they capable?
Having a succession plan in place can really make a difference.
What to consider in a succession plan
A good succession plan will take into account:
- the goals of the business,
- time frames,
- a valuation of the business, and
- contingency plans which will cover death or accident.
The plan should also contain insurance and ownership of this cover; a very important part of the process. If the ownership of insurance is not done correctly, the proceeds of the life insurance can attract Capital Gains Tax, which will greatly reduce the amount that the surviving spouse will receive.
It also wise to incorporate how you will fund a retiring partner in your succession plan.
So where do you start?
Your first step should be to get a business plan done.
Then, I’d recommend talking with an adviser. An adviser can help by conducting a detailed questionnaire and outlining what you and your partner or children want from your succession plan. Once you agree on the terms, a lawyer can then draft the document which will incorporate a buy/sell agreement – usually an adviser can help put you in touch with a lawyer with the right experience. Your adviser can also get the insurance cover in place and structure it correctly.
You should review the agreement every few years to ensure that the valuation of the business is in line with any growth, and the life policies still have the right amount of cover.
The cost of succession planning tends to stop people from getting this work done. However the cost of not doing this can be far greater.
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