Business Continuity

What Will You Do?

The decision to continue, sell, or liquidate your business is a very important one. You’ve worked hard to build your business – making the right decision now can help ensure that all your effort doesn’t go to waste.

There are many variables to consider when contemplating the continuity of your business. Give yourself plenty of time to evaluate them, and set in place the necessary tools to ensure a smooth transition for your business. It’s a good idea to contact a financial professional who specializes in working with business owners to help you sort through questions like these:

Ask Yourself These Questions

Return on Investment

 Will your family earn more from your business as a going concern, or from investing the sales proceeds?
 Has your business produced consistent earnings growth that has outpaced a reasonable market return? Do you expect future earnings growth to outpace the market?

Successor Management

 Is there a family member who has demonstrated the ability to successfully manage your company?

Adequate Financial Resources

 Does your family have adequate resources available for business and estate needs?
 Will continued ownership of the business be a financial burden during the later years of your life?
 Will continued ownership of the business cause your family to pay increased estate taxes at your death?

Income Needs

 Would your family have problems withdrawing cash on a tax-favored basis?
 Is your business structured in such a way that your family would receive a higher after-tax income by retaining the business, or by selling the business and receiving income from investing the proceeds?

Potential Buyers

 Is there a buyer who is interested in purchasing your company?
 Can you and the buyer reach an agreement that is fair and equitable to all parties involved?

Understand Your Options

Once you have an idea of what course you want to take, you’ll need to make some specific decisions about your options. Some that you may want to consider (again, with the help of your financial advisor) are:

Partial Stock Redemption

The owner of the business may want to reduce ownership interest while retaining control of the business. This is done to reduce the family’s estate tax burden at the owner’s death.

Entity Purchase Agreement

If there is more than one owner in the company, you can make provisions for control of the company to pass to the other owner, while financially benefiting the deceased’s family. For example, after Owner A and Owner B reach an agreement as to the valuation method for the business, the business purchases life insurance on each owner for the agreed value. When Owner A dies, the life insurance proceeds are paid to the company, which uses them to buy Owner A’s interest from his family.

Cross Purchase Agreement

Is the same as an Entity Purchase Agreement, except the owners (not the company) purchase the insurance.

“Wait and See” Buy-Sell Agreement

This offers a flexible alternative between the cross purchase and the entity purchase agreements. At the death of a shareholder/owner, the survivors can elect to either: a) collect insurance proceeds and buy the shares individually, or b) collect insurance proceeds and lend them to the corporation, thereby causing the corporation to redeem the shares. The corporation issues interest-bearing notes to the shareholders/owners to repay the loans.

Key Person Insurance

Many businesses have one or more key employees who have knowledge that is vital to the organization. The loss of one of these people may cause irreparable damage to the business. Key Person Insurance will compensate your business for the loss of a key employee. The proceeds from the policy may be used for things like covering lost revenue/sales, bringing in a consultant, or financing a recruitment search.

Installment Sale and Private Annuity

Many business owners don’t want to leave their business suddenly, but prefer to phase themselves out slowly. The individual(s) who will be purchasing the business will make installment payments for an agreed upon period of time, typically five to ten years.

Business Valuation

For information on how to value your business, refer to SCORE’s handout entitled Selling Your Business.