Planning for the Future for Your Small Business
Just as individuals need estate planning documents, so does your small business. Even if a substantial portion of an individual or a family's wealth may be held in a small business, many small business owners fail to plan for the future and take steps to preserve the assets of the small business if the founder dies or becomes disabled. Too many small businesses simply "hope for the best" rather than "hope for the best and prepare for the worst." Complicated family dynamics and the emotional connection that leaders and family members feel toward their companies can make it difficult to formulate a succession plan. Succession, however, is arguably the most critical issue a small business or a family business will face. I recommend contacting an experienced business attorney to help you navigate the succession planning process.
Don't wait! An emergency or the eve of your retirement is not the time to begin formulating a succession plan. Research shows, succession plans have much better outcomes when they're done in advance. The best succession plans are prepared when family and other stakeholders can discuss the plan without the emotional stress of an unanticipated death, disability, or personal issue.
Besides starting early, several things need to be addressed while formulating a business succession plan. Please consider the following:
- Successors: Successors could be an employee, family member, competitor, or a third party that might want a jumpstart to a successful business.
- Value of your Business: There are several ways to measure the valuation of a business based on its assets, its projected income, or on the market value of similar businesses and an experienced accountant can help you put the right value on your business.
- Market Research: Can your business easily be sold to a third party? Or is the value wrapped up in and dependent on a single owner? Do some research to determine if there is a market for your business after you're gone.
- Balance: It can be hard to let go of something you created, find the balance between retiring from the business, and the need for control.
- Key Personnel & Confidential Information: Develop documentation to ensure retention of key personnel and protect confidential information or proprietary business data.
- Training: A successful transition depends on adequate knowledge being shared about operations. Take the time to train the next generation thoughtfully.
- Estate Plan: If it is a family business that is going to be passed on to a single child, making sure that there is an estate plan in place that adequately protects the surviving spouse and fairly allocates estate assets to other heirs.
For businesses managed by a single owner, develop a plan in the case the owner becomes disabled. Consider the following:
- Who is authorized to pay invoiced and payroll?
- What will you communicate to customers in the event of a business disruption?
- Who can step in and manage the business to cover for short-term or long-term disability?
All of these issues can be tricky for sole proprietors and single-member LLC owners. But, if powers of attorney are in place to adequately deal with business and personal affairs, it is manageable. Also, single member LLC owners may wish to have a "transfer on death" provision in their LLC Operating Agreement that will allow for the automatic transfer of an LLC's membership interests and avoids probate court if the owner dies.
If your small business has more than one member or owner, consider what will happen to the business if one of the partners becomes disabled or dies and is no longer actively working in the business. A common way to handle these situations is to enter into a cross-purchase buy-sell arrangement. In those agreements, business partners lay out the terms of succession in the case of retirement, disability, untimely death, or any other triggering event.
To protect against untimely death, partners may consider purchasing life insurance policies on each other. The insurance proceeds are used to purchase the deceased partner's portion of the business. These agreements need to be carefully drafted and should be revisited every five years to reflect the current realities of the business. Furthermore, small businesses may want to purchase key-person life insurance policies to ensure that the business has cash on hand to protect it as it transitions from one owner to another.
Nobody knows what the future will bring. I strongly recommend consulting with an attorney and an accountant to help you structure a legally sound succession plan to achieve your financial goals and protect your family and business. Proactive planning for the future will give you peace of mind knowing that you've taken care of both your business and those that depend on its success.