Business Succession Planning

Question 1

Describe why business succession planning is challenging and complex

Answer 1

• Most businesses in the US are small and family owned, but only about 30% of those businesses survive the transition from 1st to 2nd generation
• Relational and psychological dynamics often add to the complexity of business succession.
• Implications of a succession plan to other family members versus outside parties is important to address, and many business owners don’t know what to do until it’s too late.
• Usually private companies don’t want to share their info usually

Question 2

Factors to consider when advising business-owner clients on how to best pass their business to its next owner

Answer 2

• Successor motivations, skills and talents
• Degree of IDIOSYNCRASY of the business
• Funding mechanisms
• Current owners’ desired degree of continued involvement in the business
• Incumbent’s understanding and consideration of familial and economic factors
• Owner’s ability to choose among multiple family members as their successor
• The generation on which the family business is currently operating
• Whether outside/non-family members increase probabilities of success

Question 3

Explain Idiosyncratic

Answer 3

• This is knowledge that is very helpful to run a HIGHLY SPECIALIZED BUSINESS, which is typically learned through EXPERIENCE
• Businesses with high idiosyncratic could be better to pass on to family members than others
• Knowledge that is helpful to run a highly specialized business includes:
  
  • Knowledge of business environment
  • Knowledge of internal operations of the business
  • Important contacts and networks
  • Rappoort with current firm employees and clients

Question 4

What are the common buy/sell agreements for businesses?

Answer 4

• Cross purchase
• Entity purchase
• Wait and see

Question 5

What is a buy sell agreement?

Answer 5

• Helps facilitiate the TRANSFER of a business to one or more additional owners.
  
  • So helps with business succession planning

Question 6

What are the two primary issues to consider in buy/sell arrangements?

Answer 6

1. Upon death of the owner, who wants to acquire the decedent’s shares?
   
   • WITHOUT a buy/sell arrangement, it is likely that the remaining owners are in business with an UNWANTED partner, such as the decedent’s spouse or child
   • WITH a buy/sell arrangement, a contract DIRECTS the disposition of the decedent’s shares
2. Often the vehicle to fund buyout of decedent’s shares is PERMANENT life insurance

Question 7

Describe purpose of buy/sell agreement as a business succession planning tool

Answer 7

• Increases probability of ongoing business sucess by ensuring smooth transition
• In cases of death, supports timely settlement of decedent’s estate
• Policy benefits provide immediate cash flow for purchase of decedent’s ownership shares
• Ensures an approprirate valuation of the business and an agreeable price for partners’ shares of the business
• Helps avoid conflicts because it directs who will be buying the shares