The business has grown and prospered. We just bought a building and are setting it up. Getting around to rethinking a will, insurance and succession plans; never really worked on how to protect my family and my assets before — it’s scary!
Thoughts of the Day: Most business owners don’t spend enough time thinking through how to protect their family or business. A clear succession or transition plan provides a roadmap if something were to happen to the owner. As the business grows both assets and liabilities rise, making it an ever-growing challenge to ensure the family and the business are safe. Getting things straight before something happens is essential.
The major assets of most businesses are illiquid, of uncertain value, which is continually changing. Business owners are focused on the growth and development of their businesses. Thinking about mortality can be intimidating. There’s always tomorrow — or is there?
A well-protected business always has a succession operating plan: Who takes over if someone can’t come to work? From entry level to the top of the organization, it’s wise to have more than one person trained to perform every function.
Challenges arise in succession planning because most owners are entwined in every aspect of the business, managing information that no one else knows about. Additionally, owners guarantee loans, sign letters of credit and are involved in negotiations with key vendors and customers.
Making sure that other people are aware of all that the owner does and can and will step up and perform at the top of their game during an emergency is essential. Written instructions and rehearsing what to do if the owner of the business is lost can help secure the future health and well being of both business and family.
Unwinding the assets of a privately held business is challenging, especially after the owner is gone. Time and money are wasted and an unfair burden gets placed on the survivors. Dealing with the personal implications of loss makes things even more complicated. And yet, it’s estimated that more than 80 percent of entrepreneurs have no written asset management plan.
Consider what you, family members and employees want. Who should receive which benefits? Who deals with which challenges? What belongs to the business? As an employee, waking up one morning to find that you now report to the owner’s spouse or children may not be ideal. As a family member, finding out that you’re on the hook for all of the business debts can be devastating. As the owner, it’s your responsibility to figure out the details now.
At different stages of the business’ growth and development, assets may or may not exceed liabilities. Knowing what debts to pay, and who owes what, can be especially challenging because personal and business finances are often intertwined. As early as possible in the business it’s important to separate the company’s finances from personal.
One logical goal is to transfer the owner’s equity to active people in the business. Use a will to dictate who gets the shares. Use insurance to protect the business and individuals from loss of income and taxes. Keep in mind that in many states spouses cannot be disinherited. This means that spouses must be adequately compensated for inherited ownership of company shares if the goal is to get those shares into the hands of people actively running the business.
When acquiring a new asset, such as a building or company, it’s important to think about who will get that asset later on. Work with an accountant and an attorney to get advice on how to set up purchase and ownership of major assets to insure they end up in the right hands in the future. Secure assets as you pay off any debts by using life insurance policies.
Make sure that you understand how the insurance payout works depending on who pays the policy premiums. If the company owns the policy and pays the premiums, then the company benefits, not the family. The company uses the benefits to fix company problems: debt repayment, purchase of stock, hiring a replacement to handle the owner’s job, purchasing shares, etc. If the goal is to protect the owner’s family, use a personal insurance policy, separate from the business.
Complicated? You bet! Put a team together now and figure it out before you run out of time. Make it part of annual planning with the advisors to review the need for changes.
Looking for a good book? Try “Walk Away Wealthy: The Entrepreneur’s Exit-Planning Playbook” by Mark Tepper.