Key to prosperity as the business has grown and prospered. We just bought a building and are setting it up. Getting around to making a will, insurance, and succession plans; never really worked on how to protect my family and my assets before — it’s scary!
Thoughts of the Day: The key to prosperity for most business owners is protection and planning. Owners don’t spend enough time thinking through how to protect their family or business. A clear succession or transition plan provides a roadmap if something were to happen to the owner. As the business grows both assets and liabilities arise. This creates an ever-growing challenge to ensure the family and the business are safe. Getting things in place before something happens is essential.
The key to prosperity is education and training
The major assets of most businesses are liquid, of uncertain value, continually changing. Business owners are focused on the growth and development of their businesses. Thinking about mortality can be intimidating. There’s always tomorrow — or is there?
For example, a well-protected business always has a succession operating plan: Who takes over if someone can’t come to work? From entry-level to the top of the organization, it’s wise to have more than one person trained to perform every function.
Challenges arise in succession planning because most owners are entwined in every aspect of the business, managing information that no one else knows about. Additionally, owners guarantee loans, sign letters of credit, and are involved in negotiations with key vendors and customers.
Make sure others are aware of what the business owner does. Inspiring them to step up and perform during an emergency is essential. Write down instructions and rehearse next steps if the owner of the business is lost. Help secure the future health and well-being of both the business and family.
Key steps to unwinding those relationships
Unwinding the assets of a privately held business is challenging. Especially after the owner is gone. Time and money are wasted. An unfair burden gets placed on the survivors. Personal implications of loss make things more complicated. And yet, more than 80 percent of entrepreneurs have no written asset management plan.
Consider what you, family members, and employees want. Who should receive which benefits? And who deals with which challenges? What belongs to the business? As an employee, to find you now report to the owner’s spouse or children may not be ideal. For a family member, knowing you’re on the hook for all business debts can be devastating. As the owner, it’s your responsibility to figure out these details, now.
Likewise, assets may or may not exceed liabilities. Especially at different stages of business growth and development. Knowing what debts to pay, and who owes what can be especially challenging. Especially if personal and business finances are often intertwined. Separate the company’s finances from personal is key.
Plan, prepare and respond
Transfer owner equity to active people in the company. Use a will to dictate who gets what shares. Use insurance to protect the business and individuals from loss of income and taxes. Note that in many states spouses cannot be disinherited. Spouses must be adequately compensated for inherited ownership of company shares. If the goal is to get those shares into the hands of people actively running the business.
When acquiring a new asset, think about who will inherit that asset. Work with an accountant and an attorney. Get advice on how to set up purchase and ownership of major assets. Ensure they end up in the right hands in the future. Secure assets as you pay off any debts using life insurance policies.
Uunderstand how the insurance payout works. This depends on who pays the policy premiums. If the company owns the policy and pays premiums, then the company benefits. Not the family. The company uses the benefits to fix company problems. For example, debt repayment, and purchase of stock. In addition, hiring a replacement to handle the owner’s job, purchasing shares, etc. Unless the goal is to protect the owner’s family. Then, use a personal insurance policy, separate from the business.
Complicated? You bet! Put a team together to figure it out before you run out of time. Make it part of annual planning. Review the need for changes with trusted advisors.
Looking for a good book? Try “Walk Away Wealthy: The Entrepreneur’s Exit-Planning Playbook” by Mark Tepper.
