The Case for Succession Planning

A business owner's mindset is often focused on long-term survival. Yet, according to the U.S. Bureau of Labor Statistics, only 25% of new businesses survive 15 years or longer. In the early years, owners are typically laser-focused on growth, often overlooking one critical element: succession planning.

Failing to plan for what happens when you're no longer around—whether due to death, disability, or personal bankruptcy—poses a major risk to your business's future. Importantly, succession planning isn’t just about preparing for death. It’s about protecting your business from disruptions of all kinds. In fact, it might be better thought of as business continuity planning.

The Risks for Sole Proprietors and Single Owners

For sole proprietors or single owners of S or C corporations, death or disability can mean the end of the business. Spouses or heirs may lack the ability or desire to run it, leading to a loss of value or closure.

Key person life insurance can help protect the business by providing funds to hire someone to manage operations or prepare the business for sale. Often, a business also relies heavily on an employee other than the owner. In these cases, key person insurance can be structured with permanent coverage to help that person buy the business if the owner becomes disabled or passes away.

In addition, business overhead expense insurance provides funds to cover operating costs if the owner is disabled—buying valuable time to recover or transition the business for sale.

Unique Challenges in Partnerships

Partnerships bring their own complexities. If your partner dies, you could end up in business with their spouse, children, or even creditors. These situations can create serious conflict and devalue the business.

This is where a buy-sell agreement becomes essential. It provides clear rules and a roadmap to handle events like death, divorce, disability, and bankruptcy. Life insurance can be used to fund the buyout in case of death, and permanent life insurance can help a key employee or partner buy out an owner in other scenarios.

Four Best Practices for Buy-Sell Agreements

1. Create the Agreement Early: It’s best to establish a buy-sell agreement at the start of the business. These agreements should be updated regularly as the business evolves.
2. Include a Valuation Formula: A formal business valuation isn’t always necessary. You can use a simple capitalization calculation or book value formula instead.
3. Define the Rules: This is one of the most critical components. Who can or cannot become a buyer? How will the sale be funded? Include trigger clauses that cover events like bankruptcy or disability.
4. Account for Tax Implications: Tax consequences can be significant. It’s vital to coordinate with your accountant to ensure the agreement is structured in a tax-efficient way.

Final Thoughts

Business continuity planning gives you a formal strategy to ensure a smooth exit and prepare your business for unexpected events like partner disability or financial hardship. These challenges are inevitable—but they don’t have to become a crisis if you plan ahead.

 

_{Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through WCG Wealth Advisors, a registered investment advisor. WCG Wealth Advisors and The Wealth Consulting Group are separate entities from LPL Financial. LPL Tracking Number: 761718}

_{Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.}