How do I protect the finances of the Successor of my Business?
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Here are ways to protect your successor financially.
- Allow the potential successor to get involved in managing important team projects. Try to increase the successor’s financial insights and his or her general responsibilities over time. Allow independence while ensuring that the right professionals assist the successor such as a good accountant and insurance agent.
- Consider visiting other family businesses that have transferred their business through continuity planning.
- Establish mentors and advisors for the successor. Consider setting up a board of directors if one is not in place. Implement leadership training programs.
|We do not suddenly become what we do not cooperate in becoming.— William J. Bennett
Protect your assets during Succession in the following ways:
- Cover your key persons Use life and disability insurance to cover the cost of replacing an owner, successor, contingent successor, or a key executive in the event of death or disability.
- Ensure debt redemption Life insurance proceeds can pay off bank loans and other liabilities—paid at the time of the owner’s death. Also, consider critical illness insurance, which would pay up to $2,000,000 if the proprietor were to become critically ill.
- Provide income replacement insurance (Disability insurance) benefits can provide income to an owner, successor, or key executive if disabled over certain periods of time. The income paid as a benefit to a disabled insured places less payroll burden on the company.
- Fund a buy-sell agreement Life and disability insurance proceeds can fund a buy-out upon death or disability, where there are two or more owners in business (effective for current owners or succeeding generations).
- Fund a stock redemption Where other members of the family own stock, you can buy life insurance on the owner, and make the successor the beneficiary. This will provide cash upon the owner’s death to allow the successor to buy the stock of say, sisters or brothers, based on a pre-determined formula related to equalizing the estate.
- Fund capital gains tax liabilities Where large capital gains will impair the company or reduce personal assets, or disallow a bequest of a cottage or other asset, use a permanent life insurance product, designed to pay off all capital gains liabilities.
- Create capital to equalize your estate Where one child will inherit the company, life insurance can be purchased on the owner and/or spouse, to pay the non-involved children a tax-free cash benefit in predetermined amounts, clear of probate. Avoiding resentment, you can inform these children that they will be treated fairly in the overall estate.
|Let him who would move the whole world, first move himself. — Socrates
Maintain relationships during succession
- Keep your banker informed What would your banker do if something happened to your firm’s current owner? Who else knows of the loans or the true financial status of the company? Introduce your successor (and the succession plan) to your banker and go over all the liabilities of the company. Reveal to he banker your life insurance planning that can offset liabilities in the balance sheet.
- Sustain client relationships Introduce your successor early on, to your key clients. Perhaps host client appreciation events.
- Harmonize the successor with the constituency The key players will help the company survive, including key suppliers; influential family within and without; shareholders whom you hope will seek minimal dividends in lieu of future growth; employees, especially those holding company stock; and the key executives.
- Diversify sources of retirement income Keep your retirement investments separate from your business Avoid investing all of your profits into the business with disregard to developing your own independent retirement resources. Thus, you will not need to rely on the company to create an ongoing retirement income, though you may indeed receive dividends and income from the business. Consider purchasing segregated funds, separating your personal assets from the company, while reducing exposure to creditors.
- Move towards financial independence of your business Though you leave a legacy to your successor(s), you can ensure that the legacy will have sufficient funds to survive during and after the succession. Drawing from your retirement savings can reduce the need to depend on business income (or dividends).
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