BUSINESS SUCCESSION
Transfer your business to family and others
Most California small business owners spend a vast majority of their time concentrating on cash flow and the balance sheet – a focus that too often gives short shrift to thoughtful business succession planning.
Of course, if you want your business to die with you, no planning is needed. But if you have partners or family members who plan to continue the business after you are gone, then business succession planning is a must.
If you have business partners, the standard way to transfer your ownership interest is through the purchase of life insurance. Once the business has been valued, life insurance is procured for each partner that allows the remaining partners to purchase a deceased partner’s share of the business.
Insurance can be purchased in one of two ways: through a cross-purchase agreement or an entity purchase agreement. In a cross-purchase agreement, each partner purchases and owns a policy on each of the other partners. This is usually done in small partnerships. When one partner dies, the proceeds of his or her life insurance policy is paid out to the remaining partners, who use the proceeds to purchased the deceased partner’s shares in the business.
For larger partnerships (more than five partners), an entity purchase agreement may be the preferred vehicle. In an entity purchase agreement, the business purchases a policy on each partner and becomes the owner and beneficiary of the policy. Generally, the cost of these policies is deductible, and the business incurs all costs and underwrites the equity between partners.
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