It may sound whimsical, but the moment you open a business is also the time to start thinking about how you’ll exit the business, whether you intend to sell to a partner, leave the entire business to a family member or sell as soon as you come up with the next big idea.
One of the biggest mistakes made by entrepreneurs is failing to create a written plan for their long-term exit strategy. What they don’t understand is that by creating a succession plan, which includes ways to boost the value of the business years before you want to sell or retire, they’ll have a created a road map for a more successful business.
Springfield (MO) Business Journal’s recent article, “Starting a business? Plan your exit now,” advises that you begin with creating a culture of success with your employees, especially the key people. That means fostering an ownership mentality, so they see their critical role in the company’s long-term success and their role in helping that to continue in the future, long and short term.
One of the first steps is to identify who will take over, whether that’s a partner, family member, employee or a purchaser from the outside. For death-of-owner planning, you should draft a buy-sell agreement with an experienced attorney. A buy-sell agreement will include a purchase price formula. That formula needs to be revisited as conditions change.
The next step is to decide how the buy-sell agreement will be funded. A common option is life insurance. The business owner is the insured, and the successor-owner is the beneficiary. This policy can provide necessary and immediate cash for the successor-owner to purchase the business from a surviving spouse.
If you want an employee or family member to take control at your retirement or death, start with their training and/or experience now in order to get them adequately prepared. You may also consider “stay-put” agreements to keep key managers and employees around to help with the transition to new ownership. You may want to consider a “stay bonus”, in addition to regular pay as an incentive.
Every “death-of-owner” planning scenario also applies to exit plans from the sale of the business. Here are five other contingency planning items:
- Disability, illness or injury of the owner. With disability/income replacement insurance for the owner, think about business overhead expense insurance. That insurance helps make sure the bills are paid and the doors stay open while you’re out.
- Death or disability of a key employee. Consider the expense of replacing a top manager or salesperson temporarily or permanently. What revenue would potentially be lost during the transition? Look into key-person life insurance and/or key-person disability insurance.
- Resignation of a key employee. With an executive bonus plan, a “golden handcuff” can help. One way is to contribute to a cash-value life insurance policy on behalf of the employee. The life insurance component gives the employee’s family important financial protection if she dies, and the cash value can supplement retirement savings one day, if she does not die. This will let the employee see how much she means to the business. Vesting terms in a written agreement will also make the program even stronger, because if she departs before the vesting period is complete, she’ll lose some or all the benefits.
- Commercial property and casualty insurance. These policies can include business continuation provisions to cover expenses and payroll during any downtime after a catastrophe.
- Estate planning. Review your estate plan with your estate planning attorney, with a dual focus: your business and your family’s best interests. Your plan must address estate tax and gift tax issues. It should include your will, powers of attorney and other estate planning documents.
Avoid the hazards that occur for so many business owners because they fail to plan for the future. Doing so early on, will allow your business to flourish long after you have moved on.
Reference: Springfield (MO) Business Journal (October 2, 2017) “Starting a business? Plan your exit now”