Business succession planning and insurance
Business succession is a matter that we often find businesses fail to address until it is too late.
The most common results of inadequate business succession planning are damage to the business, disputes and ill-will. In some extreme cases, the business will even be forced to fold.
Some of the issues that clients fail to consider when they ignore their business succession planning are:
- the outgoing owners are usually in a much more comfortable financial position than the incoming owners, incoming owners may find it difficult to fund a purchase;
- the outgoing owners may not want to spend as much time in the business if there is going to be a staged buyout;
- the incoming owners may feel aggrieved if there is a drop-off in performance after an initial buy-in;
- a valuation methodology can be difficult if the incoming owners have contributed to growth; and
- health concerns can upset even a well considered succession plan.
For these reasons, we encourage clients to give serious consideration to their business succession long before one or more owners are even contemplating selling their interests.
Once a plan has been formulated, parties should formalise that agreement in writing as far as they are able to do so.
As an additional part of that process, we also encourage our clients to consider who the key members of the business are and to consider what sort of insurance may be beneficial to any business succession plan. Often parties will supplement their business succession planning with insurance policies and “buy/sell agreements”.
We find that this approach generally leaves businesses in the best possible position for a smooth generational transition, leaving all parties content and hopefully with the business continuing to be as profitable as possible.
Please contact us if you would like further advice regarding business succession planning and insurance.