Does Your Business Have an Estate Plan?

Most people are aware of the fact that they should have a personal estate plan that provides an efficient mechanism for the management of their assets during incapacity and the transfer of their assets upon death.  However, entrepreneurs who run their own businesses must seriously consider a business succession plan in addition to a personal estate plan.  Owning a private business presents unique challenges that those who work for third parties do not face.  At the same time, with proper planning, a private business may also present unique opportunities for transferring wealth to the next generation.

Often, the owner of a private business is essential to the operation.  The founder might have unique skills, goodwill, or a professional license that cannot easily be transferred or taught to a successor.  Upon the death or incapacity of the owner, the same profitable business that the owner’s family relied upon for steady income suddenly falls into chaos.  The owner’s family does not have the expertise or the authority to run the business.  Key employees may execute their own “plan b” and hang up their own shingles, taking customers/clients, goodwill, and other resources of the business with them.  Furthermore, they likely will become competitors with a head start.  

Most entrepreneurs do not want to think about the need for business succession planning because they are too busy running the day-to-day operations of the company, working on the vision for the company, do not view their business as an asset, or simply do not want to face their own mortality.  Furthermore, developing a comprehensive business succession plan takes a lot of time and requires the business owner to face tough decisions.  The best way to start is to identify the most realistic goals of a succession plan.

The three most common goals of a business succession plan are (1) owner’s exit strategy; (2) wealth transfer; and (3) business continuity.  

For some owners, the most important objective is to allow the owner to maintain a stream of income while scaling back on his or her involvement in the business.  To achieve this goal, the plan might involve a sale of the business or a transfer of company stock to the owner in exchange for goodwill, expertise, or business secrets.

Some owners might be more concerned about transferring wealth to their loved ones (i.e., spouses or children).  In this situation, the owner is not concerned about the business continuing after death but rather “harvesting” the company’s assets or wealth for his or her family.  

Still other owners might view their business as more than just a job or a source of wealth but rather a legacy.  They might have an interest in making sure that the business thrives long after their involvement or their death.  The plan in this case might focus on identifying key employees who can be groomed to succeed in running the company’s operations and provide a mechanism for the key employees to buy interests in the business from the owner or the owner’s family.     

Business succession planning often involves the owner’s attorney, accountant, and financial advisor meeting with the family and key employees to identify realistic goals and to develop an appropriate plan.  It often takes several months to develop an appropriate plan and the business succession plan will be separate from – and in addition to – a personal estate plan.  Although it is a time-consuming process that forces the owner and the owner’s family to face stark realities and choices, a comprehensive business succession plan can protect the owner and his or her family when he or she inevitably is no longer able to run the business.