Myrna E. Arroyo: Business Planning

What is Business Succession Planning?
How do I know if I need Business Succession Planning?
If you die unexpectedly, can your family continue to run your business?
If you die unexpectedly, will your family have sufficient liquid resources to hire someone to replace you?
If you die unexpectedly, and have partners, will they pay your family a fair price for your business?
How do you protect your family in the event of an early death?
How do you know if you have a good buy sell agreement?
Does your buy sell agreement require the remaining owners to purchase the departing owner's interest when a "triggering" event occurs?
Is your buy sell agreement adequately funded?
How is the price of the departing owner's interest determined?

What is Business Succession Planning?
Business succession planning refers to the practice of using estate planning strategies to increase the chances for the survival of your family business when you retire or if you die unexpectedly.
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How do I know if I need Business Succession Planning?
The following questions will help you decide if you need business succession planning.
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If you die unexpectedly, can your family continue to run your business?
If your family cannot, who can?
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If you die unexpectedly, will your family have sufficient liquid resources to hire someone to replace you?
If your family cannot run your business without you, you should consider their liquidity needs. If there is no money to hire someone to run the business, perhaps life insurance is needed.
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If you die unexpectedly, and have partners, will they pay your family a fair price for your business?
When you are gone, you need a plan to ensure your family is treated fairly by your partners.
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How do you protect your family in the event of an early death?
The most effective protection for your family, or you, if you survive to retirement, is a well prepared buy sell agreement.
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How do you know if you have a good buy sell agreement?
Does your buy sell agreement provided which events trigger the requirement that the remaining owners purchase the interst of the departing owner? These events should include: death, disability, incapacity, bankruptcy, loss of a professional license, failure to properly carry out expected duties, and retirement.
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Does your buy sell agreement require the remaining owners to purchase the departing owner's interest when a "triggering" event occurs?
There are two types of buy sell agreements, voluntary agreeements and mandatory agreements. A voluntary agreement means that upon your death or retirement, your partners will negotiate the purchase of your interest from you or your estate. A mandatory agreement mandates that the remaining owners purchase your interest. A voluntary agrement may not provide adequate protection for your family.
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Is your buy sell agreement adequately funded?
Every buy sell agreement should have provisions for the payment of the price of the departing owner's interest by the remaining owners. The typical methods are: installment sale based on the current earnings of the business, a sinking fund whereby a certain amount of funds from the business are invested to provide for a future purchase, cash from borrowings at the date of purchase, and life insurance. By far the safest method is life insurance. The rest depend on the financial solvency of the business or the other owners at the time the purchase is mandated.
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How is the price of the departing owner's interest determined?
Perhaps the most important aspect of your buy sell agreement is the method chosen to determine the price of the departing owner's interest. The most frequently used methods are: appraisal, book value, multiple of earnings, replacement cost of hard assets, and by annual agreement. Book value, multiple of earnings and replacement cost are susceptible to manipulation when you are no longer around to protect your family's interests. For this reason these are risky methods. We recommend appraisal and as agreed upon annually by the members, as these will reduce any potential for conflict when a sale is mandated.
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