If you were to pass away suddenly, what would happen to your business? Are you ready to hand it off to a family member, partner or trusted employee? If your answer is "no," you're not alone. Nearly one in four small business owners say their businesses are not well prepared for their sudden death according to New York Life's recently released Small Business Insurance Gap survey. That's a big number when you consider there are nearly 30 million small businesses in the United States.
For any business owner, now is the time to take pro-active steps to help ensure your business continues after your death or completes an orderly closing, depending on your wishes. Even if you're like more than half of those surveyed who already plan to leave their businesses to their spouse or another family member, you will still need a blueprint to help them. You can use succession planning to guide the business into the future, strengthen your company's bottom line and help secure your legacy.
It's hard enough to deal with the grief of losing someone. Taking over a business during this difficult chapter can not only prove emotionally painful, but also can put the business at risk. Most respondents agreed that the company's annual revenue would decrease in the event of their death, requiring one to three years of recovery time. The most effective way to help avoid this is to have a succession plan and put it in writing. A succession plan must have several elements, so that someone intimately familiar with the business—as well as a complete outsider—can fully understand and execute it. Here are some key steps to get the process started:
Now is a good time to audit personnel and their job descriptions, including duties, expectations and performance criteria. Formally designate someone who can show the way in your absence. In the survey, 46 percent of respondents said their work would be done by a combination of new and current hires. If each critical position (including yours) doesn't have a "stunt double"—and only relies on the deep knowledge of one person to do the job—that's a weakness in your knowledge chain. Taking time to cross train employees now is an important step to ensuring a smooth transition down the road.
Could a new leader—or entire team—step in and keep the place running if you were suddenly out? Make sure you have readily accessible, updated information on your business' strategic plan, day-to-day operations, emergency procedures, vendors and other important contacts, and anything else required to keep the wheels in motion.
Whether you want to pass the business to heirs, sell shares to a partner or employees, or put it up for sale entirely, you should put the terms in writing, and have them reviewed by an attorney. Your document should also include provisions for funding the business: Would it be a hassle-free transfer of assets? Would there be capital to buy out heirs that comes from a loan, insurance policy, selling assets from another source?
In the survey, nearly seven in 10 said they had one or more life insurance policies for the sole purpose of continuing the business. Those funds can be earmarked to meet your business obligations and can help your successor fund the purchase of your business through a buy sell agreement.
In order to avoid legal disputes, hurt feelings and undue chaos, it is especially important to communicate your wishes in advance, so that family, co-owners, employees and other stakeholders know what to expect in the event of your absence or death. A hard conversation before an unexpected event will save untold confusion afterward.
Even a carefully developed plan is likely to require tweaks as your business evolves. New technology may impact operations. Key personnel may come and go. Your insurance needs may evolve. Laws and local regulations may affect operations and products. A family member who had an interest in taking over the business 15 years ago may now feel differently. The best way to hedge against an outdated succession plan is to think of it as a living, evolving document.
To help ensure a smooth transition, you can designate your wishes in a will or trust that can't be dismantled by survivors, partners or employees who have other ideas or understandings about your wishes. Wills are the most fundamental estate planning tools. Plans laid out in a will are triggered only in the event of your death and give clear direction on how to manage or distribute your assets if you pass away. A revocable trust is a more common way to maintain continuity in a business. The trust holds your assets while you're alive and in doing so helps streamline the transfer of your assets in a way that allows your heirs to avoid lengthy legal proceedings and court fees.
Most survey respondents have high hopes for their company after they're gone. More than nine in 10 said that keeping the business healthy and thriving is "very important" or "somewhat important" to them so that it continues to support their family, their employees and their community. With careful planning, you can ensure that the business you’ve worked so hard to build does just this.
Neither New York Life nor its Agents and affiliates provide personal tax or legal advice. Please contact your legal or tax advisor to discuss how the general concepts in this article apply or do not apply to your circumstances.
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