Secure Value by Planning Ahead for Bad Things

Bad Things DO Happen ... Or We All Die Sometime ...

Securing your business value isn't just about keeping the hackers out.  It is also about managing other kinds of risks including the very real prospect, given that we all die sometime, that a senior resource might die.  Without thoughtful planning the business might die, too.  My business, Jacadis, recently committed to Sequent, a Professional Employers Organization (PEO), to help us manage our human resources risk.  Part of their services include succession planning.  What follows is an excellent write up by Pat Carpenter, CLU, CHFC of Sequent's Retirement & Benefits Group.

Do you expect your business to die when you do?

Do you expect your business to die when you do?  If your goal is for your business to thrive, how do you intend to harvest the investment you’ve made? If you want your business to provide a continuous income stream after you’re ready to move on, think out and plan the transfer of ownership. Whether the business is sold to a partner, a competitor, a group of employees or to family member(s), there are four elements necessary for a smooth transition. These four elements include:

• A business that has value independent of the founder
• A realistic market valuation of the business
• Willing buyers, and
• An agreement that compels the sale and the purchase at the agreed-upon amount

As your business has grown, you have developed products and services that your clients need. Vendors count on you for part of their business growth. Your management team helps determine, and employees execute, the business plan.  As the business’s life cycle matures, your role has evolved from technician to visionary.  Clients, vendors and employees have deepening relationships. You can move on now.

Setting a realistic market price for the business should be determined by a CPA certified in valuation. He or she will analyze the books, economic conditions, market segment and growth potential. There will be questions about anticipated revenue, and new niche markets. The CPA will select which valuation method is most appropriate for your business and set a purchase price and a formula for determining any future purchase fluctuations.

Evaluating a potential buyer is the next logical step in your succession plan. Often, key employees or family members will have already indicated interest in purchasing the business. Do they have all the skills, vision and drive necessary to be successful? To thrive in a competitive marketplace takes more than being a good technician. In addition to figuring out ‘How much?’ and ‘Who?, you might want to invest in training for any deficient skill areas.

The agreements that compel the sale usually take two forms.

The first option is an employment agreement that defines the conditions under which stock, or phantom stock, is transferred to the successor owners. This provides the current owner “golden handcuffs” and the key employees an incentive. Usually the transfer is contingent on reaching certain productivity goals.

The second option is the Buy-Sell document. This describes the transfer of stock upon the death, disability or retirement of the owner. It delivers assets to the owner’s family while removing them from the business. These documents should be prepared by attorneys who specialize in closely held corporations.

In addition, both agreements need to be funded in order to complete the final transfer. This is usually accomplished by purchasing life insurance and disability insurance on the owner, payable to the business or the successor owners. Insurance provides the funds to purchase the stock. In this way, non-participating family members are gracefully moved away from day-to-day operations and dividend expectations.

Good planning pays off for everyone:  your clients, your employees, your family, vendors and creditors. They all want to work with a company that will thrive, even through a key transition. With proper tax planning, the business will provide an annuity for the owner for the next five to ten years. Your investment in the succession planning process could pay dividends for years to come.

Patricia Carpenter, CLU, CHFC

Vice President, Business Development

Pat Carpenter has more than thirty years’ experience working for and with emerging businesses. A veteran of three start-ups, she has spent more than thirty years of her career working in the life and health insurance industries as a field underwriter, group representative, broker and consultant. Pat has worked closely with business owners to create custom-tailored succession plans and wealth accumulation programs. She has analyzed financial strategies, plan designs, and employee incentives. In addition, she has educated people from line workers to Board members about how to optimize their employee benefits. Pat has earned the Chartered Life Underwriter and Chartered Financial Consultant designations from the American College.

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