VIRGINIA BEACH, Va. — You’ve spent a lot of time and energy building a successful drycleaning business your family and employees can rely on, but at some point, you’re going to transition out of your business. Planning for that transition can mean the difference between success and failure.
Be sure to choose a strategy that is suitable for the long-term goals of both the drycleaning business and its employees. Weigh objectives, time horizon and risk tolerance, as well as any associated costs, before investing.
A business succession plan is simply an agreement between seller and buyer of your drycleaning business that defines:
- Triggering events that will initiate a transfer of the business;
- A purchase price that reflects the true value of the business; and
- How the seller should be paid for his or her interest in the business.
Of course, it’s important for an attorney to draft the agreement, but your own team of specialists can help by providing sample agreements and consultative support.
There are two simple and effective types of succession plans:
Entity Purchase Arrangement — In an entity redemption plan between owner-employees, each owner enters into an agreement with the business for the sale of their respective interests to the business.
Cross Purchase Arrangement — Each business owner purchases a life insurance policy on each of the other owners. When an owner dies, the surviving owners use the death benefit to purchase the deceased owner’s share of the business.
IDENTIFY SUCCESSION GOALS
Every business owner is different. Some will use their drycleaning operation as their own retirement fund or as a source of income for their surviving spouse, while others may leave it to their children as a gift.
As you think through this for yourself, some good questions to answer are:
- What are your personal plans for the future?
- What’s your plan for the future of the business?
- How would you like to transition out of the business?
- Who will own the drycleaning business when you’re gone?
- What needs to be done to get the successor ready?
- How will the successor acquire your business interest?
- What do you think your drycleaning operation is worth?
- How much do you need for retirement?
- How much would your family need if you were gone?
SUCCESSION PLAN HELPS
A business succession plan helps to protect you and your family from having to find a buyer and negotiate a price and terms when you may lack leverage because of a disability, an impending retirement or an untimely death.
A business succession plan will help:
- Solidify a market for your drycleaning operation;
- Establish funds for the purchase of the drycleaning operation;
- Create certainty about the price, terms and financing;
- Identify triggering events for succession;
- Establish your retirement income;
- Provide a sense of security for your surviving family members;
- Facilitate a smooth and controlled transition; and
- Reduce the potential for future litigation.
Business succession planning can include life insurance products to specifically meet your needs as a business owner. For example, some of the options could be: fixed and variable universal life, so you have options whether you’re conservative or more aggressive; policy pricing that gives you the opportunity to accumulate cash value more quickly; or underwriting flexibility, with both guaranteed-issue or simplified-issue underwriting available (certain qualifications must be met).
Whatever the size of your drycleaning business, create a strategy to plan, achieve and protect your company, your goals and your income.