Without a Business Succession Plan, Its Continuation is Doomed

The successful transfer of a small business is dependent on funding sources and continuation documents to ensure a smooth transition from the present to future owner. The document needs to cover every contingency. Both parties agreeing to a business valuation at a future date may actually be the easiest part of the purchase agreement to draft. The harder scenario is to script the contingencies of death and disability into the buy-sell agreement, especially when family, friends and key employees are involved.

When there is no continuation plan or the plan doesn’t address death and disability scenarios, conflicts may arise between surviving owners and the decedent’s family. This can lead to litigation, hurt feelings and family turmoil. It can delay probate and the settling of the estate. Sometimes these problems between parties can inadvertently go public and result in the loss of clients, which lowers the value of the business. It’s generally better for all concerned to go by the book, as if transactions were between strangers. So the draft not only includes an agreed-upon valuation for the business, but spells out what the directions are if death and disability occur. It’s important to engage an attorney who specializes in business succession planning and an insurance professional, who understands life and disability insurance policies.

Placing life insurance and disability coverage to indemnify economic loss among the participants in the sale of the business is always money well spent. Interestingly enough, it’s rare one of the key players in a business buyout dies before the transfer of ownership is completed. The cost of a five- or 10-year term life insurance policy is generally inexpensive. But a disability to an owner or future owner could cause serious consequences for the buyout to move forward. Insurance claims studies indicate the odds of becoming disabled for 90 days or longer are greater than dying during the course of employment. It also suggests the odds are significant one of the business owners will suffer a long-term disability.1

There are four foundational agreements to most business continuation or succession planning: Buy/Sell, Cross Purchase, Stock Redemption and Wait and See Agreement. An attorney who specializes in business succession and continuation planning can steer you to the plan most suitable for the situation and then customize the agreement specific to the parties involved.
1 Based on the 1985 Commissioners Individual Disability Table, most recent available

Syndicated financial columnist and talk show host Steve Savant interviews Caine Nakata, co-business owner and entrepreneur on business planning strategies.