Business owners know that it’s important to plan for the succession in ownership of their companies. It’s the means by which they secure their retirements and get to see their life’s work continued. That’s why many institute plans for their succession – whether it’s a transfer of the business within their family, to trusted employees who have been groomed to take over, or in a sale to an outside party.
However, just like it has changed so much else in our lives, the Covid-19 pandemic has altered the environment in business succession planning. So, even though you may be spending much of your time trying to keep your business going, it’s also important to keep your eyes on the finish line and review your succession plan to see what might need to be altered.
Here are six items that should be reviewed, there are others, but these are a good start:
- Insurance. Many succession plans use insurance, life or disability, to pay for the purchase of the business owner’s stock or interest. However, the amount of insurance coverage purchased when the plan was started may not be enough to pay for the current value of the company. Also, many plans place more attention on life insurance for when the owner dies. Long-term or permanent disability insurance is often given short shrift in the calculations. But, as the pandemic has shown, this type of insurance is more likely to be needed. It’s time to review your insurance coverage.
- Leadership Team. Identification and cultivation of a leadership team is important for any business to prosper after the owner leaves. This is true whether you plan to turn the business over to the current leaders, you want a third-party purchaser to pay top dollar for your business, or you want your family members to have the security of a leadership team backing them. It’s time to review who these people are and if they are ready to step up. Also, you may want to provide key-person insurance on them in case they are not able to serve.
- Valuation of the Business. Shareholder agreements and similar succession contracts often include the method to value a business when an owner departs. Some of these agreements use the value of the business at the end of the previous fiscal year. But this can be a problem if an unusual circumstance causes a dramatic change in the value of the business after the end of the previous fiscal year. Is your company worth what it was worth on December 31, 2019? It’s time to review your agreements to see how the business is going to be valued – and to include an exception in case of unexpected events.
- Low-Interest Rates Invite Buyers. You might think this is a bad time to sell your business. You might be wrong. Even though the current value of your business may have declined because of the Covid-19 pandemic, one of the government’s responses to the pandemic, the lowering of interest rates, makes credit more attractive to buyers. So, there may be more buyers who are interested in your business. And, if your business is in a position to survive the pandemic, savvy buyers will look at your future potential rather than your crisis value. It’s time to review your stage in the succession process and consider whether it’s time to take advantage of this feature of the Covid-19 environment.
- Gifting as a Strategy. Another feature of the current economic environment is that the value of businesses is depressed. And, if part of your succession plan involves the gifting of stock or other ownership interests to family members or employees, this may be the time to do it. The lower the current value of your business, the more stock or other ownership interests you can gift without a gift tax hit. Another benefit is that current tax law allows an individual to gift up to $11,580,000 without any federal gift tax – but this benefit is scheduled to drop almost in half at the end of 2025 – and may be reduced sooner if there is a change in government after Election Day. It’s time to review your gifting strategies, so you don’t miss this window of opportunity.
- Estate Planning. A good business succession plan should always work with the business owner’s personal estate planning. As noted above, there are advantageous tax benefits in place now that may not be around much longer. It’s time to review your estate plan to see whether this is the time to move on these benefits.
Finally, if you don’t have a business succession plan or yours is not in strong shape – and the National Association of Corporate Directors states that only one in four businesses have a formal plan in place – it’s most definitely time to work on one.
ABOUT BRIAN HUNDERTMARK
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Brian J. Hundertmark has more than 30 years of experience representing the needs of his clients. They rely on him for their estate planning, business succession, and asset protection needs. He designs personalized estate plans to help minimize the burden of gift and estate taxes while protecting assets from potential creditors. Brian makes estate planning as timely and painless as possible.
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