Many business owners support their families through their businesses. Some have larger-than-life lifestyles, and why not, they earned the right to enjoy their success. But what if something were to happen, such as sudden death or permanent incapacitation? An event like that could have a massive impact on your business and the lifestyle of your family. Here are three things you should consider when planning for the future success of your business and the well-being of your family.
Keep ownership agreements up to date
Many owners create ownership agreements early in the business’s life. As your business mature, those agreements should be updated. Buy-Sell Agreements are the most common type of ownership agreement that doesn’t evolve as the business grows. Having an outdated Buy-Sell Agreement is often worse than having no agreement at all. Consider this.
Mary Mallon started a successful construction company about 25 years ago. She made plans through her estate plan, that if she ever died, the company would go to her husband Robert. Years later, she met Jane Jones. When Mary brought Jane in as a 50:50, they signed a Buy-Sell Agreement listing that the reasonable value of the company at $400,000. Each year, the company grew. Mary and Jane each brought in a salary of $275,000 for their families, on top of health benefits and other perks. One day, Mary developed a mysterious disease and died.
When Mary died. Mary’s husband was devastated. He had no experience running a business and immediately called Mary’s advisors, asking them to help him. They found that Mary’s personal estate plan was out-of-date and that the Buy-Sale Agreement for the business entitled him to a payout of only $200,000 even though the company had a value of over $8 million.
In this example, Mary put her family in an impossible situation. Robert wasn’t equipped to handle this. By failing to update the Buy-Sell Agreement as the company grew, she left her husband stranded without direction or recourse.
If your family relies on the business to maintain a lifestyle, consider the consequences of your untimely departure from the business. Keep any ownership agreements up-to-date to protect your family against the unexpected.
Separate fairness and equality
If you have children, planning for future success becomes more complex. Consider a business owner, Joe.
Joe has three children: Larry, Moe, and Sue. Larry has worked in the business for 20 years, growing it from a $1 million enterprise to $10 million. As Joe approached retirement, he planned to transfer ownership to Larry and leave $1 million each to Moe and Sue after he died. When the siblings learned how much the business was worth, they demanded an equal amount in cash from their father. They didn’t think it was fair for Larry to receive what they considered to be more money. They didn’t understand that the growth of the company was largely due to Larry’s efforts.
To successfully navigate situations like this, you need to have a plan to communicate your goals to your children. Consider carefully how you’ll determine what’s “fair” and how you’ll explain that to your children. Did each child contribute to the success of the business? Equality and fairness aren’t the same, and only you can determine what’s “fair”.
Have a backup plan
It never hurts to have a backup plan. Just because a family member or third-party has expressed interest in purchasing your business, doesn’t mean the deal is done. It’s important to keep your options open and structure your business in a way that has mass appeal. The easiest way to do this is by identifying and developing value drivers in your business. A value driver is anything that can be added to a product or service that will increase the value to your customers. Regardless of who will continue your business, all potential buyers will want to see value drivers present in your business.
Another consideration is whether your chosen successor can and will be able to continue to grow the business. Implementing strong incentive plans now for all key employees may prevent problems in the future.
If you’d like help thinking through the ways to better plan for your family’s future, please contact us today.