Owners of successful small businesses generally want their businesses to continue to succeed for a long time to come regardless of who controls the business, yet they often fail to focus on succession planning for the businesses they have put so much time and energy into building. The following are some of the important considerations for business owners:
Estate Planning. Small business owners often do not have updated estate plans which outlines to whom they would like their shares in the business to pass. This can create a huge headache for both the surviving partners/co-owners as well as the family members of the deceased partner/co-owner who may no know the first thing about running a business. A business owner must not only have an estate plan that addresses this, but they should also review their estate plans at least once every few years, and as life circumstances change. Moreover, business owners must review their estate plans each and every time there is a change in the tax law.
Buy-sell Agreement and Life Insurance. Many partnerships and other small businesses have (and those that don’t, must consider) a buy-sell agreement, which dictates what will happen if a partner should die (or become disabled) during the course of the partnership. The buy-sell agreement may require the surviving partners to purchase the deceased partner’s share from his or her family. The death of the partner, in this case, will be the triggering event. But how will the remaining partners pay for the buy-out? Business owners should consider a life insurance policy on each of the partners’ lives. In the event one partner dies unexpectedly, the remaining partners will be able to purchase the deceased partner’s share and continue operating the business without having to get involved with the deceased partner’s wife, children or other heirs.
Key Person Insurance. Also referred to as “key man insurance,” this life insurance is critical in many businesses where the contributions and roles of one or more of the partners are essential to the continuation of the business. Oftentimes, one or more of the partners will have an active and important role in the company. In the unfortunate event that a key partner was to pass away, the survival of the entire business may be threatened if, for example, the other partners need to take time away from their typical roles within the business in order to take care of the activities of the deceased partner. Another issue that can arise when a key partner dies is that clients/customers may threaten to leave the business and the remaining partners will be forced to hire a very high-paid replacement, which can threaten the financial stability of the business. By preparing for this event through the purchase of key person insurance, the remaining partners can ensure the continuation of the business they worked so hard to build.
Management versus Ownership. A good succession plan should not only consider ownership of the business in the event of the disabling of one or more owner, it must also consider management of the business. The succession plan must ensure that there is someone (or a team) who can handle the day to day activities of the business, which include operations, administration, finances, etc. The person, or team, that is chosen to manage the business will be crucial to the successful continuation of the business.
Additional Considerations in a Family Owned Business. Owners of family owned and run business must consider all the issues mentioned above; however, they must also consider a host of other issues that may arise: (a) Deciding whether the business should make it to the next generation where the second generation lacks the skills and commitment of the prior generation; (b) Ensuring that the next generation can and will provide for a comfortable retirement for those in the preceding generation if the business continues; (c) Navigating the choppy waters of inter-family disputes where a greater share (or all of the business) may be left to one or more child who currently works in the business and not to other children who previously did not have much to do with the business.
It’s important that owners of small business consult with an attorney who has experience in assisting businesses with preparing for the future of their practices so that the issues described above do not create unnecessary stumbling blocks which may threaten the survival of the business.
Ronald A. Fatoullah, Esq. is the founder of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. The law firm can be reached at 718-261-1700, 516-466-4422, or toll free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also a partner with Brightside Advisors, a wealth management firm with offices in New York and Los Angeles.