How Business Succession Planning Can Protect Business Owners

What if something happens to you, and you can no longer manage your business anymore? Who will then take over your business, and will it be managed the way you want?

Establishing a sound business succession plan helps ensure that your business gets handed over more smoothly.

Business succession planning, also known as business continuation planning, is about planning for the continuation of the business after the departure of a business owner. A clearly articulated business succession plan specifies what happens upon events such as the retirement, death or disability of the owner.

A good business succession plans typically include, but not limited to:

·Goal articulation, such as who will be authorized to own and run the business;

The business owner’s retirement planning, disability planning and estate planning;

·Process articulation, such as whom to transfer shares to, and how to do it, and how the transferee is to fund the transfer;

·Analysing if existing life insurance and investments are in place to provide funds to facilitate ownership transfer. If no, how are the gaps to be filled;

·Analysing shareholder agreements; and

·Assessing the business environment and strategy, management capabilities and shortfalls, corporate structure.

Why should business owners consider business succession planning?

·The business can be transferred more smoothly as possible obstacles have been anticipated and addressed

·Income for the business owner through insurance policies, e.g. ongoing income for disabled or critically ill business owner, or income source for family of deceased business owner

·Reduced probability of forced liquidation of the business due to sudden death or permanent disability of business owner

For certain components of a good business succession plan to work, funding is required. Some common ways of funding a succession plan include investments, internal reserves and bank loans.

However, insurance is generally preferred as it is the most effective solution and the least expensive one compared to the other options.

Life and disability insurance on each owner ensure that some financial risk is transferred to an insurance company in the event that one of the owners passes on. The proceeds will be used to buy out the deceased owner’s business share.

Owners may choose their preferred ownership of the insurance policies via any of the two arrangements, “cross-purchase agreement” or “entity-purchase agreement”.

Cross-Purchase Agreement

In a cross-purchase agreement, co-owners will buy and own a policy on each other. When an owner dies, their policy proceeds would be paid out to the surviving owners, who will use the proceeds to buy the departing owner’s business share at a previously agreed-on price.

However, this type of agreement has its limitations. A key one is, in a business with a large number of co-owners (10 or more), it is somewhat impractical for each owner to maintain separate policies on each other. The cost of each policy may differ due to a huge disparity between owners’ age, resulting in inequity.

In this instance, an entity-purchase agreement is often preferred.

Entity-Purchase Agreement

In an entity-purchase agreement, the business itself purchases a single policy on each owner, becoming both the policy owner and beneficiary. When an owner dies, the business will use the policy proceeds to buy the deceased owner’s business share. All costs are absorbed by the business and equity is maintained among the co-owners.

What Happens Without a Business Succession Plan?

Your business may suffer grave consequences without a proper business succession plan in the event of an unexpected death or a permanent disability.

Without a business succession plan in place, these scenarios might happen.

If the business is shared among business owners, then the remaining owners may fight over the shares of the departing business owner or over the percentage of the business.

There could also be a potential dispute between the sellers and buyers of the business. For e.g., the buyer may insist on a lower price against the seller’s higher price.

In the event of the permanent disability or critical illness of the business owner, the operations of the company could be affected as they might not be able to work. This could affect clients’ faith, revenue and morale in the company as well.

The stream of income to the owner’s family will be cut off if the business owner, being the sole breadwinner of the family, unexpectedly passes away.

Don’t let all the business you have built up collapse the moment you are not there. Planning ahead with a proper business succession plan before an unexpected or premature event happens can help secure your business legacy, ensuring that you and your family’s future will be well taken care of.

3 Dangerous Thought Patterns That Can Destroy Your Business

Many people desire to go into business for themselves but few individuals actually do. And those who do, 6 out of 10 of them fail within the first five years. Why are these businesses failing? I’ll expose 3 dangerous thought patterns that can destroy your business and how to overcome them.

#1: Doing What You Want To Do Without A Clear Vision

A lot of people, who go into business for themselves are an expert in his or her craft. Unfortunately, most of them set themselves up for failure because, they start doing what they know to do and ignore the rest. These businesses begin operating according to the wants of the owner as opposed to the needs of the business.

It is this dangerous thought pattern that dooms their business before it even begins, and the reason is simply this:

  • The owner is so focused on doing what they’re an expert at, that they neglect working on what the business needs.
  • They have no vision for where the business is going or strategy for progress.

It is vitally important that you develop a compelling vision, values, purpose and mission for your business that gives you the clarity and fortitude to withstand the ups and downs that any business will inevitably have.

#2: Doing Business From An Employee’s Perspective

In the beginning, you can do whatever your business needs you to do. But, after some time, you find yourself doing not only the work you know how to do, but all of the difficult stuff you don’t know how to do as well. Then, ever so slowly, you realize there’s more work to do than you can possibly get done.

There’s nothing wrong with being an expert in your craft. There’s only something wrong with being an expert crafts-person who owns a business without changing this dangerous thought pattern! Because:

  • As an expert crafts-person turned business-owner, your focus is upside down. You see the world from the bottom up, from an employee’s perspective, rather than from the top down, from an entrepreneur’s perspective.
  • You were so used to working in somebody else’s business that, now, you’re working in your own.
  • But, while you’re working in your own business, there’s something more important that isn’t getting done. And it’s the strategic work, the implementation of systems that will lead your business forward, so you can live the dream you’ve envisioned.

If you want to have a viable business and not work yourself to death with this dangerous thought pattern, you must be able to make growth systematic and predictable. You need to think of a business as a series of systems that will lead to growth.

#3: Having a Tactical View Rather Than a Strategic View
When a business owner is focused on working in their business rather than on it, they become unclear of their priorities and try using every tactic they can get their hands on to bring in the income they desperately need. They impulsively try the latest trend or newest technique hoping it will work.

Well, in business, hope and guessing are not tactics. Having this dangerous thought pattern is not how you operate a successful business! You must have specific objectives or some way to measure whether that tactic is working or not.

You need to use a Vision-Based Framework to help you get the clarity, direction and focus your business needs to go forward. It helps you filter out distractions and use the right tactics that are in alignment with your business’s vision and strategic plan.

This is so important because, what your business is about is more important than what you’re selling.

As long as you have the dangerous thought pattern of viewing your business from a bottom up perspective, you are doomed.

Understanding the difference between what goes on in an expert crafts-person’s mind who owns a business, the mindset of an entrepreneur whose focus is on building and growing a successful business, and the 3 dangerous thought patterns that can destroy your business, is critical to discovering why most businesses don’t thrive and ensuring that yours does.

Small Business Loans With A Poor Credit Score

Many small business owners struggle with obtaining business finance, and there is absolutely nothing unusual about this. Getting a business loan for small businesses, such as retailers, restaurants, garages and so on, is not as simple as one would think from the bank.

This is not to say however, that getting a business loan is not possible. It all depends on where one goes looking for the loan. Typically, there are two primary options that business owners have, approaching their local banks and going to a private funder or lender.

Banks and small business loans

Banks look at applications for small business loans from their perspective and their perspective is determined by their criteria. When we speak of criteria, there are numerous criteria and these are all non-flexible as well as stringent.

Typically, banks require high credit scores, which should be around about 700 or over. If a business applying for a loan with the bank lacks excellent credit, their application will be rejected simply based on that one criteria. In conclusion to banks and credit scores, business funding with bad credit with a bank is not a possibility.

This is not to say that there are not a number of other criteria, which banks follow carefully and take equally seriously as well. The criteria of banks have been established over the decades based on shared experience, and these criteria are across the board.

As is generally acknowledged, banks are not very keen on funding small business loans. The reasons for this are many and one of the primary reasons is that, small businesses are considered to be high risk investments from the banks perspective and experience.

Private funders and small business loans

With a private lender the situation is completely different from what a business owner will experience with a bank. Private lenders have a completely different list of criteria to provide cash advance for business owners.

As private lenders primarily offer MCA (Merchant Cash Advances), the criteria for these is simple. An MCA loan is an unsecured loan, and does not require high credit scores either. As a result it’s easy to qualify for this kind of funding.

However, many a small business owners don’t look upon MCAs from a friendly perspective, and they do have their reasons. The interest rates are higher than traditional bank loans, and most business owners want low interest rates.

The point with MCAs is however not to compete with bank financing, as they are both in quite different arenas. Apart from the fact that they are both financing for businesses, the entire process, requirements, features and all other details related to the funding are completely different.

With an MCA loan the question how to qualify for small business loans does not really apply. Only in very few cases are small businesses turned away by private lenders. Generally, most businesses receive the funding they require for their business.

MCA loans V/S bank loans

Merchant cash advances or MCA in short are generally accompanied with high interest rates. Far higher than what the bank provides, and the reason for this is these are unsecured short term loans.

There are many businesses who would never qualify for a traditional bank loan, regardless of how badly they need it or want it. If their credit scores are low, or if they are unable to provide the collateral the banks require their applications will be rejected. This is not to say that there are not a lot of other grounds on which small business loan applications are not declined by banks. Also, banks are under not obligation to provide funding to those they choose not to. This leaves many small business with no other option.

For an MCA loan a business requires nothing much in the way of credit scores and collateral. The basic criteria for an MCA loan is mentioned here, as follows. The business should be at least 12 months old and a running business. The owner of the business should not be in active bankruptcy at the time of the loan application. Finally, the gross income of the business needs to be at least $10 thousand a month.

The easy criteria makes it simple to obtain an MCA, and the drawbacks are definitely the interest rates and the duration for some business owners. However, those who capitalize on such business funding are those business who either have no choice, or those who require quick business loans. Some of the advantages are the processing time frames, which can be as little as a couple of days.