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Home » Estate Planning » Small Business Succession Planning

Small Business Succession Planning

May 21, 2019 by John Potter

succession planningSuccession planning for small business partners can often be facilitated with a buy sell agreement. The best way to explain the value of this type of an agreement is to provide a simple example. Let’s say that you have one business partner, and the business has been successful over the years. Your share in the business is your most valuable asset.

What would happen in the event of the death of you or your partner? If you were to predecease the co-owner, your heir or heirs would own your share of the business. This could put your partner in a difficult situation, and you would also be negatively impacted if the circumstances were reversed.

Business owners commonly use a buy sell agreement to address this type of situation. With the type of agreement called a cross purchase plan, you and your partner would agree on the value of your respective shares in the business.

You would take out life insurance policies on one another equal to the value of a share. Upon the death of one partner, the other partner would use the insurance proceeds to purchase the deceased partner’s share from their estate. As a result, the heir or heirs would have liquidity, and the surviving partner would have total control of the business.

A similar approach can be taken with regard to retirement. However, this would involve the purchase of permanent life insurance with a cash value. When the buy sell agreement is strictly for estate planning purposes, term life insurance that has no cash value would suffice.

We should point out that the cross purchase plan is not the only type of buy sell agreement. There is also the entity or stock redemption plan. With this buy sell agreement, the details are the same with regard to the purchase of life insurance. However, the purchaser is the business itself rather than the individual co-owners.

Balancing Inheritances

Another business succession planning scenario that can arise involves people that are running a family business. To use another example, assume that you started a restaurant when you were a relatively young adult.

Over the years, the eatery became quite popular, and you invested in expansion. You have two children, and your daughter started working at the business as soon as she got out of college. Your son decided to embark on a different career path outside of the hospitality field.

When you are planning your estate, you know that your daughter would like to continue to run the business for the rest of her working life, and she has a child who is very interested in the culinary arts. The restaurant is worth a good bit of money, and you want to leave it to your daughter.

At the same time, you love each of your children equally, and you do not want to favor one over the other when it comes to their inheritances. Under these circumstances, you could use life insurance as a business succession planning solution.

You determine the value of the business, and you take out a life insurance policy with your son as the beneficiary. The value of the policy would be equal to the value of the business, and inheritances would be balanced.

Attend a Free Seminar

Our attorneys are holding a series of informative elder law and estate planning seminars in the near future, and we are very excited about the information that will be presented. There is no admission charge, but we do ask that you register in advance, because space is limited. To do just that, visit our seminar schedule page and follow the simple instructions.

We Are Here to Help!

If you are ready to discuss any elder law or estate planning topic with a licensed attorney, we would be more than glad to assist you. You can give us a call at 606-324-5516 in Ashland, Kentucky (or 859-372-6655 in Florence, Kentucky) to request an appointment, and our number in North Carolina is 704-944-3245 (Charlotte, NC and Huntersville, NC). There is also a contact form on this website that you can use to send us a message.

 

  • Author
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Filed Under: Estate Planning Tagged With: buy sell agreements, succession planning

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Overall The Potter Firm was very professional. They took what could of been a very complicated process and were able to break it down so it was a lot easier to understand. We are confident we now have made the right decisions in our estate planning. Good firm to work with.

DKS & KMS Client Review August 28, 2020

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John Potter has been a real pleasure to work with. He is very knowledgeable and explains things in a very simplistic manner so the average person can understand how/why the laws are written. He is very attentive and asks questions in such a way that not only helps him understand your goals, but also helps you think about what type of goals and expectations you should be considering. Exemplary client service.

David J. Client Review August 28, 2020

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My husband and I selected Ms. Potter to assist with our small business. She responsive and attentive every time I have a question or need assistance, and is extremely knowledgeable and able to answer any legal question I have had. I know I can count on Ms. Potter for all of my business legal needs and I would highly recommend her to anyone needing legal assistance with such.

Jillian Client Review August 28, 2020

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