It is an incredible accomplishment for business owners to craft a business succession plan establishing the structure that will transition the business out of the hands of the current owner(s). However, even the best business succession plan will be considered a failure without a proper funding mechanism. The considerations in support of setting up a method to fund your business plan are easily overlooked.
First, it should come as no surprise to anyone that the death of a family member is a disruptive and costly event. This issue is compounded when the family member is the sole or primary provider. An established source of liquid funding will provide a source to fund the expenses and meet your family’s daily needs while they sell the business or transition control of the business.
Second, a business has ongoing obligations that must be met regardless of the owners passing (e.g. payroll). Generally, meeting these obligations is important whether you intend to sell the business or continue to operate it as a going concern. However, the business may suffer a severe lag in income for the first 6-9 months after an owner’s passing because the business’ work flow is driven by that owner’s relationship and/or reputation. Accordingly, a liquid source of funding may be essential to keeping the business operational or marketable during that time period.
Third, liquid funds may be necessary to fund the Buy/Sell Agreement between the business owners. Many companies have multiple owners that do not want to be in business with co-owner’s spouse or kids. A Buy/Sell Agreement is a valuable tool for determining who will own the business if one co-owner dies. However, a Buy/Sell Agreement is much less useful if there are no funds available for the company (or other owner(s)) to exercise their rights to purchase under the Buy/Sell Agreement. An established source of funding will ensure that the owner(s) can utilize the Buy/Sell Agreement for its intended purpose.
Fourth, business owners may face uncertain estate tax obligations. Estate taxes may be owed at the time of the business owner’s death. An established source of funding may be invaluable for the purpose of paying those taxes without having to liquidate assets to generate revenue.
The best way to fund your business succession plan will depend on your business, its operational requirements, the structure of your succession plan and your ultimate goals. Take some time to discuss these ideas with your planning professional to make sure you have a plan in place that maximizes the benefits provided by these tools.
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