culled from:newyorklife.com
- Be cautious. Make sure your heir apparent is the
right person in terms of temperament, personality, competence, and
personal goals. In most cases in which grooming a successor has worked,
the choice was obvious from the start. - Set up a probation period so you can terminate the relationship if you find that this person simply will not work out.
During that period, keep everything informal, strictly verbal. At the
same time, even when they go to a formal agreement, make sure it
contains a termination provision. They know that dealing with an
incompatible successor could tear the company apart leaving everyone
with nothing. - Create golden handcuffs and incentives to ensure that their replacement stays until the baton is passed.
An ambitious successor needs and deserves gradually increasing
authority and benefits. Options include deferred compensation or the
opportunity to acquire partial ownership prior to your retirement. Both
parties need something to win by sticking to the agreement and something
to lose if it falls apart. - Put it in writing, along with the help of your
attorney — locking in who does what and gets what and spelling out all
details and caveats, including how to establish the final valuation of
the business. This formal buy/sell agreement protects everybody. - Build in a funding mechanism. This is crucial. No
matter how good the terms of the buy/sell agreement, it will be
worthless if the money is not there when needed to carry out the plan.
Under one option, the successor may be able to purchase the company from
ongoing profits. Other options include setting up a sinking fund or
allowing the successor to simply borrow the money. These options may
work. However, they may not be appropriate for you. Another recommended
funding vehicle to consider — that can protect your family in the event
of your disability or premature death — is life and disability income
insurance.
(Products available through one or more carriers not affiliated with New
York Life; dependent on carrier authorization and product availability
in your state or locality.) - Have a backup plan. As a business owner, you know
that very few things go exactly as planned. What if your business hits
tough times or your successor dies, becomes disabled or — all too common
— leaves because of a personality conflict? Or what if there simply is
no heir apparent waiting in the wings? Sometimes, it’s best to dismantle
the business.
