Let’s face it! Small business owners have the worries and stresses that other families do not have. Small business owners worry about employees, revenue, sales, workers compensation claims, potential lawsuits, and then providing for their own family and having enough time to spend time with their kids. Small business owners have a lot to worry about on top of what every family thinks about every day.
For these reasons, it is important to have a business succession plan for your small business. However, first of all, what is a business succession plan? A business succession plan is a written agreement that states what will happen to the business when certain events take place. For example, what will happen to the business should you die unexpectedly? What will happen to the business should your business partner declare personal bankruptcy? What will happen to the business should you or your business partner(s) go through a divorce? What will happen to the business when you decide that it is time to retire? In the simplest terms, business succession planning is planning for when you walk away from the business or when something happens in your personal life that could have effects on the business.
The most common business succession strategy is accomplished with a Buy/Sell Agreement. In the most common scenario, a buy/sell agreement can state that in the event of Owner A’s death, Owner A’s share must be bought for $X by Owner B and Owner C. In addition, this type of buy/sell agreement would be funded by a life insurance policy. Therefore, in the simplest terms, Owner B and C would be required to purchase Owner A’s share and the life insurance proceeds would be paid over to the estate of Owner A. In essence, this type of agreement both benefits the existing business owners, as well as providing peace of mind for Owner A’s family.
However, buy/sell agreements can also be used to plan that in the event of Owner B’s insolvency and personal bankruptcy, his share will be sold back to the business. In addition, buy/sell agreements can be structured to provide that in the event of a personal divorce, Owner C’s share would be sold back to the business. Finally, you can structure a buy/sell agreement to account for the terms of a business owner’s exit from the business after a certain number of years or upon the occurrence of a certain condition.