Turnover of business ownership, part 2
ATTEND A DISCUSSION ON BUSINESS OWNERSHIP TURNOVER
On Tuesday, June 6, at 11:45 a.m. in the US Bank executive conference room, 422 White Ave., the law office of Griff, Larson, Laiche Wright and a team of investment professionals will discuss these issues in more detail with those who have an interest in succession planning. Seating is limited to the first 15 individuals. Call 245-8021 (ask for Melanie) and reserve a place.
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In part 1, we touched on owner turnover of a business. In part 2, we will discuss an exit strategy and the tools available to a business owner for succession planning.
Bankers, accountants, financial planners, insurance sales people, attorneys and management consultants spend a great deal of time working with individuals on how to handle their retirement or estate plans. When the individual’s assets include ownership of a business, that planning must include an exit strategy for the owners.
Oft times, that exit strategy is partially described in a shareholder agreement or an operating agreement or perhaps something called a buy-sell agreement. Sometimes these agreements are combined, but they need not be, depending upon the purposes of each and upon the needs of the company and its owners.
A shareholder agreement is just what it sounds like — an agreement among shareholders of a corporation on important issues such as how the shares are valued in the ordinary course of business, what restrictions exist on the ability to vote or sell those shares and how or how much shareholders paid for the shares they own.
An operating agreement addresses similar and even more detailed issues for the owners (called “members”) and managers of a limited liability company. Typically, an operating agreement, and the structure of the limited liability company itself, provide for more flexibility than a shareholder agreement in the way the company is run. As a result, limited liability companies are often selected by new business owners as the entity of choice.
A buy-sell agreement is an agreement between co-owners of what is often called a “closely-held business” (meaning one whose stock is not traded publicly) that provides for the orderly valuation and disposition of the interest of a deceased, disabled, retired or even terminated owner. Many times, a buy-sell agreement is supported or funded by an insurance policy so that there is a way to raise the money needed to purchase the interests of the exiting owner.
As important as these tools are, they do not always address all of the details of transitioning a business from one owner or set of owners to another. Unfortunately, in many cases, the plan for the exiting individual is well-considered and well-executed, but the plan for the business that will remain behind is not quite so effective. Reasons for this difference are many, but usually deal with the complexities inherent in anticipating how an organization will react to a change as significant as the one that occurs when one owner leaves and another takes over.
Business owners who are contemplating a change will do well to make certain that the business they leave behind is as large a part of the exit strategy as is the personal interests of the exiting owner. Any succession plan that does not deal with each aspect of the owner’s exit is putting the enterprise, and the employees that remain behind, at risk.