If you are an owner in a closely held business or family enterprise, you are probably too busy to spend time thinking about what would happen if you or a partner suddenly exited the company. Besides, the real estate market is improving, the stock market is up, and the economy is slowly climbing out of a hole. The last thing you want to ruminate on once again is “what could go wrong now?”
But the fact is that business succession planning and contingency planning is best done when times are good because solid plans that ensure the survival of your business can be difficult or impossible to formulate after an emergency or disaster has already struck.
Nonetheless, many business partners fail to address this issue when times are good, and that is one reason why roughly two-thirds of family enterprises do not make it to the second generation (see, e.g., statistics published on www.money.cnn.com by the Small Business Administration).
There are many life events that can derail a small enterprise, even when it is running smoothly on a well-designed track. However, a good succession plan can provide the emergency switches necessary to keep your business rolling in the direction you choose, despite any of the following obstacles in your path:
- Death of a partner or shareholder;
- Long-term disability of a partner or shareholder;
- Disability of a spouse that necessitates early retirement of a partner or shareholder;
- Divorce of an owner that subjects business assets to litigation; or
- Any other event that causes a partner or shareholder to exit the company and/or sell his or her business interests (e.g., they become a reality TV star or a lottery winner).
Furthermore, a good attorney can make the process of planning for these life events quick, easy and affordable, especially compared to the time and expense that will be lost if a critical contingency strikes before you are ready for it. Thus, there is no need to lose sleep or lose focus on your business in order to formulate a plan to ensure its survival.
Seven Tips for Preserving Your Legacy
If you do sit down with an attorney, you might want to consider these seven tips for successfully preserving and passing along your commercial legacy.
- Define Your Goals. What is it that you want to transfer to your heirs or successors? Do you want to pass to them a working business, a chance to play a specific role in that business, or just an income stream from that business? Perhaps you want to perpetuate some charitable activity or institution tied to your family brand. Whatever your goals, develop a vision of the future that makes sense for your particular business, partners and family.
- Define Your Likely Obstacles. Try to figure out what could derail your business, whether it might be a common life event, such as disability or divorce, or an event more particular to your enterprise, such as a partner or shareholder being subject to individual liabilities or hazards identified with your industry.
- Develop Contingency and Succession Plans for a Crisis. Your business may be able to survive some crises, such as one brought on by temporary disability, simply by purchasing the right kinds of insurance and having plans for someone competent to fill a vacant role. But other kinds of crises, such as death or divorce, will require more formal planning and the execution of business transfer or succession agreements that specify to whom and how ownership shares will be transferred after the exit of a shareholder or partner. You and your fellow partners or shareholders should also select a mutually acceptable method of business valuation well in advance of an event necessitating transfer of ownership shares. Some people choose to agree upon a fixed valuation at the start of each year, some agree to have an independent accountant or business professional set a valuation upon transfer, and others prefer an evaluation derived from an average of multiple appraisals. Your attorney can help you choose whether these or other methods might best fit your situation.
- Funding and Financing. In the event of a partner’s unforeseen death or need to exit from the business, you should have a method of funding or financing any coincident purchase of that partner’s interests from his or her family. You might want to agree with your partners that any “buyout” of shares by the business will be paid for over a defined period of time to allow for financing of the buyout from business income. You should probably also consider the purchase of key-man life insurance for all partners as well, naming the business as a beneficiary on each policy, so that the funds can be used to buy back interests from the family of a deceased partner, if necessary.
- Identifying Successors and Preparing Them. A business has a better chance of succeeding for generations if the enterprise consciously identifies the roles that members of future generations have to play, and matches those roles with the talents and character attributes of specific individuals in those generations. It seems intuitively obvious that your chosen successors will also need to be well-trained and prepared to step into the roles they need to fill so your business enterprise can survive, but this step in the planning process is often overlooked. Again, your attorney can help you to find business professionals who are experienced in helping family enterprises to develop the talent needed to perpetuate a legacy.
- Focus on Being Equitable, Not Equal. If you own a large orchard and plan to leave your land in equal parts to sons and daughters who are a mix of operators and non-participants in the family agribusiness, you are putting the operators at the mercy of the non-participants and jeopardizing the legacy of the family business. Your attorney can help you find ways of dividing your estate equitably without putting the viability of your business in jeopardy.
- Seek Advisors Who Know Your Industry and Work Well with Others. Every industry presents special practical or even legal issues associated with any transfer to heirs or successors, and you can benefit from working with an attorney who has experience dealing with the issues of your industry. Burns & Levinson offers legal counsel with experience related to many segments of the agricultural, bioscience, energy, financial services, health care, machine shop, manufacturing, real estate and technology industries, among others. Our firm also has a long tradition of working collaboratively with accountants, appraisers, brokers, insurance professionals and other business service providers to help our clients meet their goals and objectives.
You can save a lot of time and expense if you take a little time now to develop a vision of the future for your business enterprise. By working with an attorney to plan for that future, you can also preserve a legacy that you spent a lifetime building.
Who Needs Estate Planning and When?
For many people, the value of an estate plan will far exceed its cost due to tax savings. Furthermore, estate planning is not just for individuals who have a net worth in excess of state or federal exemptions (currently set at $1 million and $5 million respectively, but subject to change). The following people can greatly benefit from estate planning with experienced legal counsel:
- Individuals or couples who have dependents or beneficiaries with special needs;
- Adoptive parents who need to make special provisions for inheritance that differ from state law provisions that apply to those without a legally enforceable plan;
- Other non-traditional families, such as those of unmarried couples or domestic partners;
- Married persons who have previous spouses or children from a prior marriage;
- Those who have special charitable goals; and
- Those who have ownership shares in a closely held business that could suffer grave disruption from an inheritance battle or significant death taxes on their estates (such people can benefit from a well-structured agreement providing for life insurance on key owners in amounts adequate to fund the purchase of a decedent’s shares, according to valuations set in advance by agreement).