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Succession Planning For Small Businesses
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Article 4: Involve Your Business Partners
With an exit plan in place, you’re ready to start the process of creating a formal succession plan document.
You should involve all of your business partners, including such people as your banker, accountant, vendors, etc. in the process, where appropriate, and keep them informed as your plans take shape.
Your banker, in particular, will have a vested interest in your succession plans and can play an important role in planning the financial aspects of the business transfer.
For example, your banker can help structure the financing so that it doesn’t crimp the business’ cash flow too tightly. This might involve structuring the sale as a step-sale, in which the actual transaction occurs over a period of years, to lessen the financial strain on the company.
Or if owner financing is required, your banker can structure it in such a way that you will receive periodic cash payments (as retirement income, for example) without assuming the risk of holding the note.
In the book “The Family Business Policies & Procedures Handbook” (Family Business Publishing, 2006), family business advisor Mike Cohn recommends that you create a “succession memo” for your banker that includes the following:
- Who will be the new president and what is his or her experience?
- How will reporting relationships change?
- Is there a board of directors and, if so, who will be on it after the transfer?
- Will your spouse have an active role in the business post-succession and, if so, what will it be?
- Will the business need to provide ongoing income to the spouse of a disabled or deceased owner? If so, how much, and how will those obligations affect financial ratios and other bank loan covenants?
- Will buyouts be triggered as a result of an owner’s death or disability? If so, are the agreements (e.g., a buy-sell agreement) funded with insurance, or would bank financing be required?
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Succession Planning For Small Businesses
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