Taking the Next Step

    How Much Time Do You Have?

    How Much Time Do You Have?

    When it comes to succession planning for your business, time can be your friend or your adversary. That’s because succession planning is a process, not a one-time event. The earlier you start (even when retirement may be decades away), the more time you will have to take advantage of opportunities and adjust for set-backs.

    Your Financial Professionals can help guide you through the process and highlight important considerations you’ll need to know when creating a plan specific for you and your company. Below will give you a sense of some of those considerations and the impact available timeframes will have.

    20 Years Out

    20 years ahead of retirement is often an ideal time to start planning your succession. It gives you ample time to not only identify your successor, but to groom them for the job. Twenty years may sound like a long time for "grooming," but when you think about it, it’s really not. You’ll want them to work in every department or operation you have, and they’ll need that much time to really hone their technical, managerial and leadership skills.

    And let’s not forget the most important part: You’ll want your successor to have at least 20 years to accumulate the money they’ll need to buy the company from you!

    But of course the focus can’t be just on the successor. You’ll need that time to simultaneously develop a strong management team who’ll support you now, and the successor in the future. They too will need time to build their skills.

    If a buy-sell agreement is part of your succession plan, life insurance is a common way to fund the agreement. The younger you and your partners are when you apply for the policies, generally the lower the premiums will be. If the policy you choose to fund the agreement is a whole life policy with cash value1, that cash, which could be used for a buy-out or to supplement retirement.

    10 Years Out

    If you are only starting to create your succession plan ten years before your planned retirement date, we have good news: You can accomplish most everything in 10 years that you can in 20. However, it might be more expensive, and you’ll have less room for error.

    It can be more expensive because the premiums for any life insurance funding vehicle that is part of your plan will be higher since you, your partners and key employees are now 10 years older. This includes life insurance you purchase for yourself personally (for your estate plans) and insurance purchased as part of your business continuation plans (buy-sell, deferred compensation, executive bonus). If the life insurance policies used for these purposes include cash value, the cash value will have less time to accumulate. So you may have to find another way to make up the difference, which can be more expensive as well.

    You’ll have less room for error when it comes to training your successor, building a management team and preparing the company for transition. And when your chosen successor only has 10 years to accumulate the funds needed to purchase the company, you may have to settle for a down payment with installments. Here is where you need to be perfect: If the successor isn’t up to the task and the business is put in jeopardy, you might be forced to return to the company in order to salvage it, and your retirement plan.

    Five Years or Less

    You may not be able to develop and execute as comprehensive a succession plan as you would like if you only have five years or less to prepare. Identify your successor and immerse them in the business, introduce them to your customers, and download your knowledge. Assemble your management team and get their commitment that they will stay on board (this could get pricey). Put together your buy-sell agreement and get the funding in place. And finally, keep your fingers crossed.

    Succession plans are made up of many moving parts. Each part needs regular review and ongoing adjustment. And each part needs to work in concert with every other part. Will you be able to create a plan that can do that? Only time will tell.

    1 Access to cash values through borrowing or partial surrenders can reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.

    The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

    Insurance products issued by Massachusetts Mutual Life Insurance Company (MassMutual) Springfield, MA  01111-0001 and its subsidiaries C.M. Life Insurance Company and MML Bay State Life Insurance Company, Enfield, CT 06082.

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