At our law firm, we help small-business owners in Colorado plan for the eventual exit from their commercial enterprises by developing creative, comprehensive business succession plans. In part 1, we introduced the idea of creating a business exit strategy for the eventual departure of the owner or founder of the business, which could be either unplanned such as because of disability, a planned retirement or several other potential scenarios.
Today, we will cover some of the more common legal vehicles used in business transition planning.
BUY-SELL AGREEMENT: A buy-sell agreement is a contract among co-owners or partners that designates what will happen to an owner’s business interest upon certain events. For example, the agreement might provide that upon divorce, voluntary separation, retirement or other triggering events, the business or the other owners collectively have the right to buy out the owner’s interest, rather than have the owner sell his or her interest or transfer it to a family member or other alternate disposition. The agreement may provide for how the value of the departing owner’s share will be determined, whether by agreement ahead of time or at death by a preset method.
LIFE INSURANCE: Life insurance can be purchased by the business itself or by each partner or owner on the lives of all owners or partners. Upon the death of any owner, the policy proceeds are used to buy back the business interest of the deceased owner so that the business stays intact, rather than having one portion pass through the provisions of the will or estate of the deceased owner.
FAMILY BUSINESS: For a closely held family business, succession planning can be tricky because of family relationships. For example, maybe all of an owner’s children want to work in the business eventually, but only some of them have the business skill or acumen to step in. The owner-parent must communicate with them about what will be best for the business and still provide for all the children. For example, the owner could develop a succession plan that allows one or two of the children to become owners who manage or run the business and the rest of the children could still own a portion and draw income from the business profits.
This post just scratches the surface of a complex area of law and business. An experienced estate planning attorney with a business background can assist a small-business owner with succession strategy appropriate to the owner’s goals, business and family needs.