Subscribe to "Family Wealth Matters"
Business Planning: Protect What You Have Built
In business, risk tolerance can be your most
valuable asset. In planning for your long-term future, it can be the greatest
threat to your accumulated wealth. It's never too soon to get your ducks in a
Successful entrepreneurs are skilled at turning their
visions into vibrant, thriving businesses. They're nimble in the marketplace and
aren't afraid to take chances. They're good at many things -- but planning for
the future isn't necessarily one of them.
In a recent survey of 500 business owners by Entrepreneur magazine, 80% reported
not having a power of attorney, only 24% had a will and 13% had a trust, and 65%
had no planning documents at all. (See the Entrepreneur article, An Emergency
Safety Valve: The Case for Entrepreneurial Estate Planning.)
If you or a loved one is a business owner, those statistics may produce a lump
in the throat. They might also prompt you to take action.
Realities of Business Ownership
Consider how close this scenario comes to your situation: You built and nurtured
your business for several years. Your business ownership is your most valuable
asset and will provide the foundation for a comfortable retirement. You've
achieved a lot of success, but you know how fragile it can be. Your family's
success and prosperity may depend largely on how long you can sustain the
business. Your financial protection consists of insurance, and your savings
provide your financial cushion.
What you may have overlooked is that even the most well-protected businesses can
be exposed to risk if its owner doesn't have core planning documents. Having a
last will and testament, living trust, durable financial power of attorney,
health care power of attorney, and other important documents isn't just a good
idea. It's essential.
Insurance can cover you for unforeseen events like medical emergencies, but only
a coordinated estate plan and business exit strategy prepare you and your
company for a healthy future. As a recent Business.com article, 5 Estate
Planning Tips for Entrepreneurs, points out, you need to take additional steps,
such as a buy-sell agreement with your co-owners and preparing a well-conceived
A will lets you lay out your final wishes. This most basic estate planning
document allows you to specify how your assets will be handled after your death,
and to whom they should be transferred.
You should also have a durable financial power of attorney. You're used to being
in charge - until you need surgery that puts you out of commission for a few
months. Without a clear plan in place, questions start piling up. Who pays the
bills? Who keeps your customer relationships alive? Who accesses your bank
accounts, and how?
To keep your business and personal affairs private, you may want to set up a
revocable trust. Because a will must pass through probate, that can be a problem
for a small business that needs to protect sensitive information. Moreover, the
cost and delays associated with probate can threaten business continuity. If
different needs arise in the future, the trust can be modified and assets can be
moved in and out to accommodate business needs.
We can help you think through and set up a business succession plan. At the core
of this plan is a simple question: What happens to the business when you want to
move on, and preserving your business value requires an orderly transition,
either internally or to an outside party? Or what happens if the unexpected
occurs, and your role is diminished by illness, injury, incapacity or death?
A good succession plan clarifies how ownership will be transferred; establishes
rules for hiring, compensating and promoting family members; and specifies how
disputes will be resolved. The most important issue here is putting a plan to
paper and defining "succession" as you see it.
If you have business partners aside from family members, set up a buy-sell
agreement. This document is a mechanism for redistributing an owner's interest
in the event of death or disability. Such an agreement is also helpful if an
owner declares bankruptcy or is going through a divorce.
Buy-sell agreements include cross-purchase and stock-redemption agreements that
allow the remaining owners to redeem your stake in the business. You want your
beneficiaries to be fairly compensated, so this agreement will also specify how
the value of the business will be determined: the asset approach, the income
approach, or the market approach.
See also: "Business Succession Planning:
Avoiding the Key Mistakes" and "Succession
Planning: Passing Down Control of the Family Business"
Peace of Mind
A willingness to take risks, as part of a business strategy, is the key to many
entrepreneurs' success. But risking your accumulated wealth by ignoring or
delaying sound estate and business planning is not a strategy - it's a failing.
Roll the dice in business if you like, but resolve today to devote a few hours
to protecting what you've built. It will give you peace of mind that you'll
never appreciate until you have experienced it.
More about estate planning and
asset protection at Hoopes Adams & Scharber..