RENO, Nev. — As a business owner, you take steps to protect day-to-day operations. However, many business owners fail to consider how they will protect their business when they are no longer able to work.
One of the most important things you can do to protect your business is establish an estate and succession plan, including a buy-sell agreement. The contingency of any business owner leaving the business or dying must be addressed to ensure you, your family and business partners have a plan in place when this occurs.
Having an estate plan is the best way to ensure a smooth transition in the event of an owner’s death. Even having a basic plan in place ensuring someone is authorized to operate the business on a temporary or permanent basis will protect the value of the business if it is to be sold.
Identifying who will succeed you in your business is one of the essential decisions that must be made when establishing an estate or succession plan. Placing someone in the business when he or she is unqualified, or unwilling can be detrimental to the future success of the business. Defining the roles of children, spouses or partners will help ensure that the business remains operational without disturbance.
Some business owners define eligibility for inclusion in the business by the amount of time that a child or spouse has invested into the business. This guarantees the most qualified family members will take responsibility for the business.
Having three children who have never worked full time in the business together become equal owners could be a disaster. Instead, consider a plan whereby a family member could become a silent owner. Such a plan must be carefully crafted to avoid power struggles and other conflicts.
A valuation process should be implemented as the precursor to the institution of the estate and succession plans. There are several scenarios in which a plan would be instituted, such as the passing of an owner, disability or retirement.
In the event a child, spouse or partner wants to take over the business and buy out the other business partners on that partner’s death, a life insurance policy that provides the financial means to buy out the partner’s shares may be a good component to build into the estate plan. A life insurance policy is also a means to provide assets to family members who will not receive an interest in the business.
A good succession plan should also outline the role of any business partners. A buy-sell agreement essentially defines the exit strategy for partners. The agreement determines what will happen in the event that an owner exits the business for any reason, including retirement, disability or death.
The agreement would define, among other things, who is eligible to purchase the departing owner’s shares, what method valuations would be used to determine the value of the business in the buyout, and which events trigger a buyout.
If a family member or business partner is not interested in or is incapable of assuming a leadership role in the business, consider a plan to identify a key employee, and give her or him the right to buy into the company.
Often there is a valued employee who is skilled and knowledgeable as to the daily operations of the company. In this case, it may be in the best interest of the business to give that employee the option to become an owner. This approach assists with employee retention and offers overall consistency during a period of transition.
Having a buy-sell agreement with your business partners is critical. No one really knows who will become the buyer or the seller. A younger partner may decide he or she wants to leave the business when they lose their passion for it or to pursue another avenue.
There should be a plan for valuation of the leaving partner’s interest and how that interest will be paid out. The agreement should further address financing terms as the business may lack the funds to cash out the leaving partner’s interest.
When negotiating a buy-sell agreement, each party should have independent counsel to represent his or her interests, or the agreement could be voided.
Gloria M. Petroni is owner of Petroni Law Group in Reno. With more than 39 years of experience in family law and estate planning, Ms. Petroni focuses her practice on divorce and family estate planning and small business planning. Go to petronilaw.com to learn more.
