Business Succession Planning—Why You Need A Business Transition Plan?

Whether we actually have an estate plan or not, most of us know it’s a good idea—something we should “get around to” one of these days. But if you’re a small business owner, it’s best to have an estate plan, including a business transition (or succession) plan, in place sooner rather than later.

Case in point: A few months ago my cousin had a sudden heart attack and died without a will. He probably meant to get around to making an estate plan, including a transition plan, with his two business partners. Now it’s taking a lot of time—and costing a lot of money—to get things sorted out. It’s also caused added grief for his family.

Plan For Selling Should Be Your Choice

“Every entrepreneur has to sell their business eventually,” says Grant Robinson, a partner with accounting firm BDO Canada LLP in Guelph, Ont. “They either sell involuntarily, because of sudden death or because they go bankrupt, or they sell voluntarily and they choose the time and circumstance. A business transition plan helps make the choices easier. It’s always better to sell on your terms and it takes better care of your family.”

According to the latest figures released in December 2007 from Statistics Canada there were more than 2.3 million business establishments. This includes all Canadian businesses that had at least one paid employee; had annual sales of $30,000 or more; or were incorporated and filed a federal corporate income tax return at least once in the previous three years.

Robinson says it’s almost impossible to know how many of these business owners would have an estate plan in place that includes a business transition plan. Small businesses are often family-run, or a business might be inherited and then run by another family member, and this can lead to extra challenges.

Where to begin “It’s imperative to have a buy/sell agreement,” says Greg Pollock, president and CEO of The Financial Advisors Association of Canada, or Advocis.

There are questions that need to be asked—and answered—as part of setting up a business transition plan for your estate:

  • What if no one in the family wants to run the business?
  • What if the family decides that it’s best to terminate the business?
  • How do you equitably distribute the assets if only one family member is going to inherit the business?

“It can get very complex and it can lead to a lot of dissention, maybe even bitterness, among the family members or the business partners if there is not a good agreement in place,” says Pollock.

He adds that it is best to have life insurance on all of the business partners, which will provide for the family and for the transition of the business. This needs to be set up at the time the business is formed and contain an agreement for the remaining partners to purchase shares from the estate of the deceased partner.

The plan may also include freezing the shares at the time of one owner’s death. If the business is incorporated then there needs to be corporately-owned life insurance as well as personal life insurance on the business owners.

“Each case is unique, so it’s best to get specific advice to separate the business issues from the personal issues involved with the estate plan,” says Pollock.

The bottom line: Don’t try and do it yourself. There are complex issues specific to the legal, accountancy and insurance situations, so you need the help of a team of professionals.

“Your financial adviser is not a lawyer or an insurance agent and there is a growing trend to take a team approach to devising an estate plan, which the adviser can help to set up to maximize benefits for the family,” says Pollock.

Robinson agrees that outside advisers are needed to professionalize the business process. “In many small businesses, especially family business, many entrepreneurs don’t work on the business—they just see themselves working in the business.

Risky Business Not To Have A Plan

The benefits to having a plan are clear, but what are the risks of not having a plan?

“If you fail to plan, then in essence, you are planning to fail,” says Robinson. “Most entrepreneurs know how to build business, but they may not know how to transition the business to new owners or the next generation.” Through BDO, Robinson runs The Success Care Program to help entrepreneurs, their families and their advisers with transition planning.

“If you don’t have an estate plan, then the government becomes a partner in the business,” says Robinson. He notes that most people think of the planning process as being too technical, but adds, “When you work with your professional advisers it is very empowering because you are making all of the decisions that are right for your business—and your family.”

Reference: Christine Peets, Bankrate.com

Filed Under: Business Succession Planning

Please visit our Business Succession Planning & Business Succession Blogs websites for more information on this topic. Contact Pozzuolo Rodden Pozzuolo, P.C. Law Firm today, for further questions and concerns on this matter.