A business succession plan is a written agreement between all the partners of a business and their associates, so that if one of the partners dies, becomes totally or permanently incapacitated or critically ill, then the outgoing partner will sell, and the continuing partners or their associates will buy, the outgoing interest.
The main focus of this process is to ensure that in the event that there is a loss of one partner, not only do his or her shares or units transfer to his or her fellow associates in accordance with the agreement, but there is a funding process in the form of insurance or assets to satisfy the appropriate value placed on those shares. The payment is placed in the hands of his or her family in the most cost and tax effective manner, minimising such areas as capital gains and other time consuming processes.
Also to be considered are other strategies and agreements to be put in place to address a sale of the business, the closure of the business, or the breakdown and rights of purchase of existing share-holders/unit-holders in a buy out situation.
A well constructed business succession plan should address issues such as:
- Valuing the business partner's
- Determining the exposure to the business in the form of debt and personal guarantees
- Anticipating the capital gains tax assessment
- Deciding when the business succession will operate and addressing contingencies
- Determining the time of disposal which will crystallise the parties’ capital gains tax liabilities
- Taxation treatment of the proceeds
- Integrating the business succession plan into the partner's overall business and personal estate planning (will)
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