But they are also keeping their eyes open to outside ownership in the event that neither of them ever has children. “At this time, we are trying to identify the skill sets we would like the next executives to have,†says Jessica. “Ideally, we would like a family member or internal candidate to take over the reins. Nonetheless, we realize that as the security industry evolves, an outside candidate may be more appropriate. Our advisers and colleagues are helping us understand the intricacies of preparing for a major management or even ownership shift. We want to find someone who is committed to the legacy and values of Dorothy and Wilbert Johnson.â€
4. Protect Your Assets
Besides a fair valuation, a buy-sell agreement should have some means of funding the purchase from the former owner. Often, life insurance is used to cover the possibility of an owner’s death. “We have been looking into key-person insurance,†Jessica says. Similarly, disability insurance might fund a buyout if one of the owners is unable to keep working for the company. In case an owner retires or just leaves for greener pastures, the purchase might be made over time, from future company revenues. To cover such a contingency, it’s important that the departing owner is confident that the company will remain in good hands, generating enough cash flow to eventually close the deal.
5. Develop an Exit Strategy
Succession planning doesn’t end with an estate plan and life insurance. It includes transferring the trust, respect, and goodwill that has built up over the years.
Thomas Wacht of White Plains, Johnson Security’s other attorney, notes that a buy-sell agreement should have some provision for an accurate valuation of the business interest that will be bought or sold. “An opinion from a qualified expert can cost thousands of dollars,†he says, “but that could be worthwhile.†Karlen adds, “Most business owners don’t know what their business is worth today let alone what it will be worth at some unspecified future time. There are numerous methods of addressing valuation, including requiring that, at the time of the required or permitted buyout, the value be determined by applying a specified formula (for example, a multiple of earnings), or obtaining an appraisal if the parties cannot agree upon the price.â€
“With a reasonable valuation, both sides can be treated fairly and tax problems may be avoided,†says Wacht. The Internal Revenue Service tends to look hard at family business buy-sells, alert for valuations designed to reduce taxes.
The Johnsons have discussed a buy-sell agreement. “We recently met to talk through the specifics of our proposed agreement,†Jessica says. “The next step is for us to review our goals and the information we discussed with our attorneys and our accounting team. Ideally, the buy-sell agreement will be finished soon.â€