Choosing a successor is not an easy task, however if you follow the steps outlined below, the task will be more organized.
1. Choose Your Successor
The successor must be someone who has the right skills and ability to lead your company once you decide to leave. If you cannot do this on your own then seek the advice of your board of directors if you have one. Otherwise enlist the aid of an attorney, accountant and business succession plan consultant to aid in the choice. Making the decision should not be based on emotional factors but rather on objectivity. The plan should not be completed within months of your decision to retire, but rather between ten and fifteen years prior.
Life Insurance for owners that have business partners, could be perilous to the ongoing operations and allow for the succession plans to be needed and used. The death of one business partner could result in considerable loses for a business, and could force a business into insolvency. One of the most important things for the owners to determine before a succession plan is initiated is their life insurance policy. Life Insurance can be held by a third party or by the business on the owner’s life, so long as the third party has an “insurable interest” in the insured’s life. An important document to have executed between all owners is a buy-sell agreement funded by life insurance. In this case when any partner passes away the life insurance proceeds are paid to the business for running the operations. Another beneficiary can be chosen but there must be assurance that the funds will be used to help run the business. There should also be a stock sale agreement either as part of the buy-sell or as a stand-alone agreement. This will outline how the stock of the deceased partner will be distributed to the other partners or purchased by the business.
Business Interruption Insurance
A second type of insurance that should be purchased is Business Interruption Insurance, protects the business in the event of an interruption to the usual business operations. Business interruption coverage is added to a property insurance policy or included in a package policy.
When drafting the second step of the plan, the financial needs of the owner and his/her spouse and family must be considered. Many experts contend that a retired individual can live on roughly 80 percent of their working salary; however, that number is often unrealistic. This is due to the fact that the financial needs many times will surpass 100 percent of their previous income due to the possibility of travel, gifts to family, extra money spent on grandchildren, all can take the predecessor over and beyond their former income.