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How Will Your Business Survive You?

Vol. 27 Issue 5

Post Categories: Law

How will your business survive you? This is not a question anyone likes to think about.

No matter what, it is planning for the end of the run on something you have invested your heart, time and money in. Sometimes your exit is voluntary. Sometimes
it’s not. Here are a few points every privately held business owner should consider:

  • Your business is the most important, and possibly the largest, asset you own. It should be treated that way.
  • It’s your main source of income, your largest investment and provides your best return on investment.
  • You are probably not the only person that relies on your business. Consider your employees, vendors, customers and any other strategic partnerships you’ve been able to hash out. What happens to them if your business goes under?
  • You are the most important employee in your business.
  • Your business should be capable of paying out you or your family and still be able to continue without you.

So what type of planning should you consider? A business will either die with or succeed its owner. Those scenarios can be summed up as either a voluntary transfer or an involuntary transfer.

Voluntary Transfers

This is where you get to call your shot. You choose the who, what, when, where, why and how of your businesses succession plan.

There are several ways this can be done, and not just one way of doing it.

Several considerations will need to be taken to figure out the best way to structure this type of transfer, and oftentimes identifying the “who” aspect can be the first step. Some options could be:

Keep it in the family? // If this is a consideration, you will want to consider how your estate plan is (or needs to be) structured. This is also the one example that has planning possibilities as a voluntary or involuntary transfer (to save on taxes).

Key Employee? // You may have a manager or other employee you already trust to keep the business going.

Competitor/Strategic Partnership? // You may be able to identify another business owner who would have an interest in taking over your business, or there may be someone interested in buying you out.

No matter who you choose, it needs to be someone who is financially capable of completing a purchase. Oftentimes the ongoing profits of the business can assist the buyer with making payments on any loans, and more often than not, a portion—if not all of it—will end up with you, providing some owner-financing on the sale.

Involuntary Transfers

These transfers are caused by events completely out of your control and are usually unpredictable. They include bankruptcy, divorce, disability and death.

Bankruptcy and divorce // These may prove to be the most disruptive events to the members of a business, as you have to start considering the possibility of a member’s creditors taking over an interest in your LLC—think bankruptcy trustee, an ex-spouse, etc. In addition to making sure this is addressed in your formation documents, if you have a partner considering marriage, a prenuptial agreement should be strongly considered.

Death and disability planning // This should be looked into as soon as you think there is value in the company. Planning for death or disability is often done in some form of buy-sell agreement. This is basically an agreement that predetermines how your company will be purchased in the event you become disabled or die. It could be done with another owner(s) of the company or even with a nonowner. If done early enough, and the owner is healthy enough to keep the premiums reasonable, you can use an investment vehicle like life insurance to fund all or a portion of the purchase price.

One final tip // Plan early, and review often. Waiting until the last minute may eliminate some very good options—or possibly even cause the death of your company.