Advance Planning for Your Business Exit Strategy

DEWITT, Mich. - Dec. 10, 2020 - PRLog -- As a business owner, there's a good chance your life has been wrapped up in your business for quite some time. Still, the day will likely come when you're ready to retire or pass the leadership role on to the next generation, maybe your children or one of your employees. Business continuation, or succession planning, is a strategy that ideally takes place over a period of time to make sure the new owner is adequately prepared to replace you as the leader of the company. It's a critical tool for ensuring your business continues to operate efficiently long after you move on to other things.

At Edward Jones, we look at your business exit strategy through the lens of retirement. If you're depending on the business for all or part of your retirement income, it's important to know how much the business is worth. If your net worth is completely tied up in the business, and you don't have much in retirement savings, you may need to monetize the business. Unfortunately, at a time when business owners need to get a good price for their business, they often discover it's not worth as much as they anticipated. For years, they may have viewed the business primarily as a job rather than an investment.

Keep in mind that planning for the continuation of your business is critical not just in the future, but today as well. Without a plan for continued leadership, employees could lose faith in the company and look for employment elsewhere. The uncertainty may be too great, and their personal job security may take precedence.

Buy-Sell Agreements

A buy-sell agreement is generally used prior to retirement to help ensure the business continues operating in the event of an owner's death. For instance, a business partner would purchase a life insurance policy that names their partner as the beneficiary, and vice versa. If one partner passes away, the surviving partner can use the proceeds to purchase the deceased partner's share of the business. Known as a cross-purchase agreement, this tool can enable the surviving partner to continue running the business.

Particularly in family businesses, a one-way buy-sell agreement may be the best option, especially when combined with adequate estate planning. When a business owner wants to pass the business on to a son or daughter, for instance, that child purchases a life insurance policy on the business owner parent, collects the proceeds and uses it to purchase the business from the estate or surviving parent.