Let’s journey together for a moment through the winding roads of entrepreneurship. I understand the rush of seeing the business grow to new levels, the anxiety of big deadlines, and the thrill of hitting that yearly target. I’ve been there. Yet despite your achievements, a nagging thought occasionally pops into your mind when your head hits the pillow:
“What if I’m not around tomorrow? What happens to my business, my team, and my family?”
Then, when you wake up, you think, “Sure, that’s a risk, but what are the odds?” and get on with your day.
It’s natural to prioritize the daily challenges of running a business over planning for a future you can’t visualize. But the reality is that life’s unpredictability doesn’t wait for opportune moments. Without a plan for an owner’s unexpected death, a partner or spouse with no interest in running the company often becomes a majority owner, resulting in a downward spiral for them, the family, and the company.
As a business leader, you’re dedicated to not just profits but to values. You want your company to thrive because it means the people you care about – your team and your family – will thrive.
The Compass most wish they had.
In this landscape of constant variables, there is power in a well-crafted business succession plan. I’ve spent my career walking with individuals like you through the intricacies of financial and succession planning. The idea of “business succession planning” is often met with a sense of overwhelm, combined with not knowing where to start, causing this daunting task to sit on the to do list for another day.
But it doesn’t have to be that difficult. Using a guided step by step planning approach will help you gain the clarity and confidence that you have done the right thing and will ensure not just financial security but the respect of family and employees as the great leader you are.
Here are three steps to consider to kickstart your business succession plan.
1. Decide who will take over?
Selecting a successor for your business is a critical step in safeguarding its future. It’s about ensuring that the company you’ve built continues to thrive, even in your absence. This decision is about more than business strategy, it’s about making sure the values and vision for your company, partners, and employees continue to drive the organization even when you’re not there.
Who will it be? Whether you choose a family member, partner in the business, dedicated employee, or an outside party, this person must share your vision, understand the intricacies of your business, care about your team, and be able to carry your mission forward. The planning process will help you assess potential candidates, focusing on compatibility with your business ethos and operational needs.
2. Get it in writing
Now it’s time to put the plan to transfer the business to your chosen successor in writing. A buy-sell agreement is a legal document that outlines how your business interest will be transferred in the event of your death. It provides your successor the first right to purchase the business interest in your absence and is an essential tool for preventing disputes, protecting your family’s interests, and providing clarity and security as your business transfers. For more, see Buy-Sell Agreements in Business Succession Planning.
Crafting this agreement requires expert guidance to make sure it covers everything your specific business needs, A financial planner can help you work through the big picture plan to make sure your business transition is in line with your overall financial goals. Then, a business attorney specializing in succession planning can help design and draft the document you’ll need to ensure a smooth transition.
3. Provide the money for the buy out
You’ve chosen your successor and have the legal documents in place, but where will the money come from to purchase the business? How is the company supposed to come up with the funds to buy my interests for my spouse? Many well-designed buy-sell agreements end up being ineffective because the funds aren’t there when needed.
Funding a buy-sell agreement answers this question, ensuring that the funds are available when needed. Here are three common options to consider for funding your buy-sell agreement.
- A sinking fund is a savings strategy where a company sets aside a specific amount of money over time in a separate account, ensuring that the money is available when needed without financial strain. The downside? It ties up capital that could otherwise be used for immediate business opportunities or investments. It can also take years to build, leaving your business exposed in the early stages.
- Leveraging business assets involves using the company’s assets, such as property, inventory, or equipment, to secure a line of credit for the purchase without requiring immediate cash outlay. But this also introduces new risks. If the business faces financial difficulties and cannot repay the loan, these assets could be seized by lenders, impacting the company’s operational capacity, and jeopardizing the business’s long-term stability.
- Using life and disability insurance involves purchasing policies that pay out at the death or disability of the business owner or key individual. This method offers immediate financial security as the benefits are received in full – a lump sum check in the amount required to buy your interests. However, life and disability insurance can come with high premium costs, especially if you’re older or have health issues.
IMPORTANT NOTE: In some situations, you can make your life insurance an asset on your balance sheet instead of a cash flow draining expense. Expertly designed cash value life insurance plans can actually make you money, build working capital income tax free, and create liquidity for future retiring partners, all while protecting your buy sell agreement along the way.
Your Next Step
What if you could sleep well, knowing that your company and team would thrive in your absence? What would this assurance mean for your family’s security? I’ve seen this play out with many of our clients. Those who take this step sleep a lot better at night, knowing they’ve got things covered.
Whether this need has gone unseen or just been pushed to the bottom of the to do list, the opportunity to address it is just a conversation away. If you don’t have the right professional team in place, our team at Alterra Advisors is ready and committed to empowering you with actionable, straightforward strategies that secure your business succession.
Click here to see if we are the right fit to help you and let’s navigate this terrain together.
Grant Monson
CFP®, CLU®, ChFC®
Partner, Financial Advisor
About the Author
Grant grew up on a working wheat farm in eastern Washington. Today, he credits his family – who still manage the farm – for preparing him to build a business serving others. His vision to lead Alterra is built on relentless dedication to the success of his clients and the team – his extended family.
Grant’s dad says that he hasn’t worked a day in his life because “it isn’t work when you love what you are doing.” When combined with his mom’s view that “helping others should be part of every day”, Grant’s view of financial planning comes into focus. Alterra Advisors is very much a reflection of Monson family values.
Grant earned a bachelor’s degree in business and a master’s in economics at Washington State University. He launched his own financial advising practice over a decade ago, an entrepreneurial quest has become one of the most impactful things in Grant’s life. He loves coordinating the complex financial lives of business owners, bringing a depth of understanding that is rooted in his family’s own experience.
The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.