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Methods and Benefits of Business Succession Planning

Retirement and business succession often seems like a distant future for business owners, who are too busy maintaining positive cash flow and taking care about their business stability. However, it is highly recommended and even necessary to create a succession plan if you want your business to flourish and grow after you retire and hand it over to someone else. Both business owners and partners get certain benefits from business succession planning, so, there are several reasons to create such a plan:

1) The price of each partner's share is agreed.

2) Once one of the partners is deceased, the death benefits are immediately available to the retaining partners, and they can buy off their deceased partner's share without any liquidity or time limitations.

3) A succession plan can aid in allowing for timely settlement of the deceased's estate.

Business succession planning is done in the following steps:

1) Picking a Successor
Business succession planning is quite a complex task, and there are many factors to be taken into account. First of all, it is important to choose a successor. It may be easy if there is only one person you have in mind who can take over your business. However, sometimes there are several potential successors to choose from, each having their strengths and weaknesses. Also, if a business owner decides to pick a family member as a successor, it can create tension in the family due to several other contenders hoping to take over the business. These and some other reasons make some owners simply sell their businesses or their share in business in a buy-sell agreement.

2) Establishing Business Value
Another important step in business succession planning is establishing a set dollar value for the business (or your share in a business). This can be done via appraisal by a certified public accountant (CPA) or by an arbitrary agreement between all partners involved.

3) Life Insurance Purchase
After a set dollar value is determined, life insurance is to be purchased on all partners. This makes surviving partners use death benefit to purchase out the deceased partner's share. The death benefit is distributed equally among the retaining partners.

A business can be transferred in one of two ways:

1) Cross-Purchase Agreement
In this case, each partner functions as both owner and beneficiary on the same policy they purchase; the other partner(s) being the insured. This makes the face value of each policy on the deceased partner to be paid to every partner, so that they can use it to buy off their deceased partner's share at the price they agreed upon beforehand. This method can work not very well when there are many partners in the business, as well as when the partner's age difference is large.

2) Entity-Purchase Agreement
In this case, the business itself purchases a single policy on each partner, and, therefore, functions as owner and beneficiary. If one of the partners or a single owner dies, the business will use the policy proceeds to purchase the deceased person's share of the business accordingly. The cost of each policy is generally deductible for the business, and the business also "eats" all costs and underwrites the equity between partners.