If you’re a small business owner, chances are good that the majority of your net worth is the business itself, making a clear estate plan all the more important for your family’s financial security. And beyond the financial aspect, your business is your life’s work, meaning you likely want some kind of say in its future when you’re gone. But too many independent business owners leave their legacy vulnerable to disagreements between family, and in some cases the state may end up having to allocate assets. This month, I’ll be providing some insights on estate planning. Of course, I recommend you consult an experienced and trusted attorney when planning your estate, since Member One does not provide legal counsel.
Q: I have a personal will, and my loved ones know my intentions for the business should anything happen to me. Am I all set?
BK: For a business owner, a personal will may not be enough. To ensure the successful transition of your business as well as the financial security of your family, it’s best to have a detailed plan that may include items such as your succession strategy, a buy/sell agreement if you have business partners and a life insurance policy, as well as a compilation of all the information your beneficiaries would need to operate and/or sell the business if something were to suddenly happen to you. If you own more than one business, you should have a separate plan laid out for each.
Q: How do I prepare if my intention is to pass on my business to a relative or colleague?
BK: If you’re a sole proprietor and your goal is for the business to outlive you, a clearly documented succession plan is essential. First, have a talk with your intended successor and be sure that he or she genuinely wants to inherit your role. Begin preparing them for that role well in advance, perhaps by allowing them to gradually take on more responsibilities within the business while you’re still actively leading it. You should also document, securely store and regularly update all of the information your successor would need to run the business if something happened to you unexpectedly. This may include passwords for the business’s bank and investment accounts, email addresses and social media pages.
Q: What needs to be done if we plan for my family to sell the business after I’m gone?
BK: Start researching for the sale of your business well ahead of time. This can make the process as easy as possible for your family and help ensure that they sell the business at a good price. Term life insurance naming your spouse and/or children as beneficiaries may help protect your family since the sale of the business may take time to complete.
Q: What do I need to consider if I have business partners?
BK: A buy/sell agreement is a plan outlining the business’s future in the event that one owner becomes incapacitated or passes away. It could protect the deceased owner’s family from running a business they may not want, or from selling their share at an unfair price. It also can protect the surviving owner(s) from having to run the business with a new partner they may never have anticipated. The best practice is to negotiate the buy/sell agreement as soon as the business becomes profitable. The agreement should set the sale price for the business and the value of each owner’s share. It should also stipulate any terms you and your partner(s) agree upon, for example whether or not you want your partner(s) to buy out your share or whether you want to block certain individuals from buying into the business. Keep in mind that if your heirs plan to buy out your share, they may need funds from a life insurance policy to do so.
Bridgett Kidd is an experienced financial professional who serves as Member One’s Vice President of Business Services and Business Lending. Her financial education series offers tips for making smart decisions when it comes to managing your small business.
Tags: Business, Finance
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