Use of Nonqualified Deferred Compensation for Exit or Succession Planning-Part 1

One possible use of nonqualified deferred compensation plans comes up in the context of exit or succession planning. As a business owner begins to contemplate his or her retirement from a business, several issues become apparent. One is that they need to make sure the business has sufficient value that it can be transferred for the value the owner needs upon retirement. Another is that the business’s value to a successor is dependent on its ability to operate without the owner’s continuing efforts once he or she is gone.

While there are many overlapping issues which an owner will need to address as a part of preparing for an exit or succession, it is common for the owner to recognize that the growth of the business, and it stability after the owner’s exit, require the active efforts of one or more key employees. It is possible the situation may support a transfer of the business to one or more of the key employees, but it is also possible the situation will call for the sale of the business to a third party. In either situation, it is likely the owner will want to create a plan which will encourage those key employees to both grow the business so it has the necessary value, and to stay with the business after the owner leaves so the value is maintained.

Next up, Use of Nonqualified Deferred Compensation for Exit or Succession Planning-Part 2…

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