Keeping the business ownership dream alive
Published: November 2,2011
Jerry* founded Regal Printing, a successful print shop (S-corporation), 25 years ago. He has two employees but he and his wife, Elizabeth, are sole owners with all management and decision-making responsibility.
Jerry and Elizabeth pooled their savings to start the business and have spent their lives nurturing it. It is their largest asset. While their oldest daughter is very active in the business, the other two children are still too young. Will any of the children run Regal Printing someday – or perhaps one of their key people? That depends; consider these stats from SBA.gov:
• Ninety percent of the 21 million U.S. businesses are family-owned
• Only 30 percent succeed into the second generation
• Only 15 percent survive into the third
Business continuation planning can be difficult, especially with day-to-day problems requiring immediate attention. However, lack of planning can be devastating. Most likely, the 30 percent of businesses that make it to the next generation do so because their owner planned for an orderly transfer.
Jerry and Elizabeth’s situation is common. A family business is often the owner’s major asset. The death or disability of a business owner can seriously damage the business’s value. Good planning can substantially minimize this risk.
Let’s look at the following issues:
• Why plan for business continuation?
• The methods and tools to transfer business interests
• How to begin developing a plan
Business continuation planning simply means planning for the transfer of business ownership and management from the current owner to someone else. There are a number of good reasons to do so, such as avoiding the business passing to under-qualified owners, protecting key employees, or raising cash. The most important reason, though, is simply to “keep the dream alive” by ensuring the business extends beyond the owner’s lifetime. Few business owners work for a lifetime only to consciously decide to let their business dissolve when they’re no longer able to manage it.
Transfer methods and tools
Business owners should consider having a buy-sell agreement to ensure the continuation of the business and to protect them and their family. Buy-sell agreements work for all business entities: sole proprietorship, partnership, LLC, S-corporation, or C-corporation. However, owners frequently don’t know what they want to do, nor do they understand the various options open to them. Don’t let this serve as a deterrent – an effective planning process will provide these answers.
Beyond taking the all-important first step of establishing a buy-sell agreement, having the dollars available to make the transfer happen is also key. Generally, the most convenient and thorough method of funding the agreement is through life and disability insurance. Buy-sell agreements funded with insurance offer these benefits. They:
1. Create an exit timeline
2. Determine the value of the business
3. Provide liquidity to support the owner’s family
4. Identify a transferee
A buy-sell agreement best protects owners and families when arrangements are made prior to death or disability. Likewise, funding the agreement in advance ensures the money is there when needed. There are a myriad of disability and life insurance solutions available for business owners.
How to begin
It’s never too early to plan for the continuation of your business. To get started, ask yourself some general questions:
• When and how do you want to transfer your business?
• Who are possible candidates to own your business?
• What do you consider an acceptable value for your business?
• What problems could arise in the continuation process?
• Who is available to help you?
First and foremost, assess your business continuation situation carefully so your plan accomplishes your goals. A buy-sell agreement funded with life or disability insurance may offer some answers to keep the dream alive.
This column was written by Scott Summerlin, financial adviser and a financial representative of Principal National Life Insurance Co. and Principal Life Insurance Co. Principal National (except in New York) and Principal Life are issuing insurance companies of the Principal Financial Group, Des Moines, Iowa. Summerlin may be reached at (208) 841-5678.
*All personal and company names are imaginary.
While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that The Principal is not rendering legal, accounting or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisers on all matters pertaining to legal, tax, or accounting obligations and requirements.