Do you like your partner’s spouse? Do you want to run this business with them? Without proper planning you could end up running the business with the spouse or children of your partner- or having to buy them out for terms that don’t make real sense for the business to continue forward.
Some important things to consider when planning for succession:
1. You should always have funding in place before you sign any buyout agreements. Why? Because you could be on the hook for buying out a partner before you have a way to pay them out!
2. Prepare for all scenarios. There are lots of reasons you may want or need to buy your partner out. If they die, do you want to run the business with their spouse? If no, then there should be a clause for that. Difference of opinion? Desire to retire? Too ill to work or fully disabled? There should be careful thought on all of these ideas, and it should be included in the plan now.
3. Fund all your scenarios. Make sure you have a way to pay for all of the above scenarios.
4. Make sure your funding design matches your agreement design. When using insurance, make sure the waiting period works with the buyout expectation.
5. Have your business valued regularly, especially if you have had a major time of growth.
6. Make sure the value is current and accurate. Overvaluation can make a business difficult to sell and undervaluation penalizes the owners at different times.
7. Review your succession planning regularly, especially if you have had a major change in business value or a change in ownership structure.
8. Prepare for losing your money maker- people who are your key talent, your rain maker may also be a partner. If your key talent partner leaves the business, you will also need to be prepared to replace that talent.
9. Review your funding regularly. If your business is worth more, then the amount you are obligated to pay out is more.
10. Family complicates business – Plan accordingly. If you own a business with your family or if your partners family works in your business, succession planning can sometimes be complicated. Remember that inheritance and running a business are two separate issues. A family member that is not suited to running the business should not inherit the business. Deal with them separately.
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