According to the Family Business Institute, very few companies stay afloat through multiple generations. In fact, only about three percent of businesses survive four generations. Consequently, many business owners lack an outlined plan for voluntary or involuntary departure “death or disability.” Succession planning can greatly help businesses prepare for these exits and continue operations. Work with Jeremy Ortiz, Director of Succession Planning at Ion Insurance, to create a succession plan to address the unforeseen.

What is Succession Planning?

When a business owner decides or is forced to step down from their role within a company, business succession planning plays a key role. This is the process of developing a written plan for when this day comes.

Like any strategy your business may already have one in place, a succession plan follows the same basic principles. It should address the who, what, when, where, why and how.

Ion Insurance will provide you detailed guidance on setting up a succession plan customized for you and your business. All good succession plans should address the following:

  • Your Goals: Identify what you want to get out of the business when you retire.
  • Your Successor(s): Choose who will be taking over for you and outline a plan to ensure they are properly prepared.
  • Ownership: If the company will have multiple owners in the future, specify their ownership roles and percentages.
  • Management: Define steps needed to keep vital, non-owner management in place so they stay onboard through the transition and beyond.
  • Transfer: Determine when and how the transition will take place and what needs to happen leading up to that time.
  • Finances: Identify where the funds will come from to buy you out; calculate what taxes will be due and what will be the effect on your personal estate plan.

Finally, everything must be documented and communicated to all parties who may be impacted by your succession plan, including family members, key employees, trusted advisors, etc.

To formulate succession plans for our clients, Ion Insurance utilizes a Three Step Process:

  1. Business Valuation:
    • Valuation determines the present value of an asset. In business, this process and set of procedures places an economic value on ownership interest.
    • Ion Insurance gives our clients a true value of their business by conducting an informal or formal appraisal with one of our trusted appraisers.
    • Why business owners need a valuation:
      • Multiple owners – properly fund buy-sell agreements
      • Fund retirement ahead – estimate nest-egg
      • Ready to sell – determine asking price
      • Estate tax – fund the burden
  1. Buy Sell Agreement: “Put it in Writing”
    • True to its name, this legally binding agreement has two requirements. One party must sell and another party must buy a particular ownership interest in a business in the event an owner dies, becomes disabled or otherwise departs.
    • Ion Insurance assists our clients with a review of their buy-sell documents through a trusted Estate Planning Attorney.
    • Stipulations of Buy Sell Agreement:
      • How much one business owner will pay the other’s estate or heirs for their share in the business
      • The method of business valuation that will be used
      • The source of funding for the buyout
      • Who is eligible for payment
      • The definition of disability
    • Red Flags of Buy Sell Agreements:
      • Established incorrectly based on business entity type
      • Established incorrectly based on number of business owners
      • Does not account for all 5 D’s (death, disability, divorce, departure, disqualification)
      • Inconsistent definition of what is considered “disabled”
      • No proper valuation has been placed on the business
      • The agreement is not funded
      • The agreement is not signed
    1. Plan Implementation & Review the Plan Every 3 Years
      • We pride ourselves on ensuring regular reviews are conducted with all clients.
      • Agreements that involve a succession plan and/or buy-sell agreement should be reviewed at least every three years to keep them from becoming “stale”.
      • Changes in family relationships are a common reason to update your agreement. For instance, divorce or children entering or leaving the business that affects the value of the business.
      • The funding mechanism for these agreements is also critical, as research tells us many agreements are underfunded or not funded at all.
      • Funding buy-sell agreements with insurance products, specifically life insurance and disability buy-out insurance, is often the most effective method. The generally tax-free death benefit provided by life insurance makes it possible for the remaining owner to purchase the business interests of the departed owner’s family without liquidating business assets or taking cash out of the business.

“Golden Rules” of Succession Planning

According to MassMutual Insurance, there are five golden rules to remember:

  • Know all options for exiting the business
  • Know the true value of the business
  • Select and prepare the right successor
  • Put the plan in writing
  • Review the plan at least every 3 years

Ion Insurance is here to provide you with the peace of mind that you have prepared for the succession of your business.