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The “Estate Plan” for your Small Business

A Small Business Estate Plan By Liz Brown

Just as you need estate planning documents to protect the future of your family, your small business needs an estate plan to take care of your business in the event of your death or disability. Unfortunately, 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 come up with a success plan for a small or family business. But, succession is arguably the most critical issue a small business or a family business has to face and it is one that an experienced business attorney can help you navigate.

Succession Plans for a Small Business

For many business owners, the idea of formulating a succession plan comes to mind only when they’re thinking about retiring or leaving their company. But research shows that succession plans have much better outcomes when they’re done in advance. And, just like estate planning, it is less emotional and less likely to complicate family dynamics (or office politics) when these issues can be calmly discussed rather than in the setting of an unanticipated departure of key partners in the business due to death, disability or other personal issues.

Issues of a Small Business Succession Plan

There are lots of issues that need to be discussed in addressed in formulating a business succession plan. Those issues include the following:

  • Identifying a successor for the business.
  • Determine the current value of your business. You will likely want to get expert advice here to put a value on the 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 type of business.
  • Determining whether there is a market for your business. Can your business easily be sold to a third party or is the value wrapped up in and dependent on a single owner.
  • Finding a balance between retiring from the business and the need for control.
  • Assuring retention of key personnel in the business.
  • Training and transitioning the next generation to take over the business – whether that is family members who are going to succeed to the business, key employees, or third party purchasers-a successful transition depends on adequate knowledge being passed between generations.
  • 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 any other heirs.

Owners of Small Business

For businesses managed by a single owner, plans need to be in place as to what will happen to the business upon the death or disability of the owners. If your small business has more than one member or owner, owners need to consider what will happen to the business if one of the partners becomes disabled or dies and is no longer able to actively work 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.

Protecting the Small Business

To protect against an untimely death, as an example, the partners would purchase life insurance policies on each other, so if one dies before retirement, the 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 5 years or so, just like your personal estate plan, to ensure that the agreements are fair to all of the partners or members in the business, the plans will protect the business and reflect the current realities of the business.

Furthermore, small businesses may want to purchase key-person life insurance policies in order help ensure that the business has cash on hand to protect the company as it transitions from one ownership to another.

Nobody knows what the future will bring, no matter how certain it may seem in the present moment. It is strongly recommended that you consult with an attorney and an accountant to help you structure a legally sound succession plan that will help you achieve your financial goals while protecting your family and business in the future.

Proactive planning for the future will give you peace of mind knowing that both your small business and those that depend on its success will be taken care of.

About the Author

Dwight Sowerby