The number of, and the economic powerhouse created by, owner-entrepreneur and family businesses is astonishing. Entrepreneurs and family businesses account for 64 percent of the entire U.S. gross domestic product, generate 62 percent of the country’s employment and make up a staggering 78 percent of new-job growth. Estimates of the percentage of all business enterprises that are either family owned or the product of entrepreneurial hard work range from 80 to 90 percent.
While 90 percent of the respondents in a recent national survey stated that succession planning was of substantial importance, only a third had put in place a succession plan, and only about half of the respondents had thought about the possibility of temporary disability and taken steps to address alleviating the consequences that would result in such an event.
Having dedicated a large part of my career to working with closely held businesses, I have found it rewarding to see how creative, bright, hard working, thrifty and determined so many of my clients are in creating, growing and, now more and more, transitioning their businesses. While many owners of closely held businesses would like to see them passed on to the next generation of their family, many more business owners are realistic enough to recognize that their children, at least at the time the decision is made, do not have either the interest or the skill sets necessary to run and grow the business. Of course, entrepreneurs and family business owners should regularly re-evaluate the abilities of the next generation and consider options if they are either not interested or not up to the task.
Keep in mind that planning is a continuing process. Life happens: successors-in-waiting turn out to be less than desired; family members grow, learn and mature into possible successors; unanticipated internalities and externalities make a succession plan unworkable.
So what are the owners of a business to do? Here are some elementary issues to consider. Of course, the “devil’s in the details,” and that is where planning professionals become critical
While it would be wonderful to lay out a plan and have all the layers fall into place when the time comes, that may or may not happen. Regardless of your age or health, an illness or accident can waylay the best of well-made plans. While planning for your retirement in an orderly succession makes sense, you should also consider what happens if you suddenly take ill or are in a serious accident.
If a short-term absence comes about, having emergency bylaws or other designated action plans in place is critical. Of course, you have to have persons in place with the power to take up your duties. If your spouse has signature authority over bank accounts but is not an officer, director or shareholder, it is unlikely that the bank will extend other business options to either your spouse or the business, such as extending or renewing loans or lines of credit. The same issues arise if your top lieutenant, regardless of title, is to step in to the breach in the event of your sudden illness or accident. Without the ability to communicate that delegation of authority, you can’t start the plan for keeping your business operating.
How Complex Is Your Business?
There is a world of difference between planning for a one-person business and planning for an enterprise that has multiple layers of management and hundreds of employees. There is also the type of small business where the owner oversees the bidding, supervises the work and employees, and may even figuratively, if not literally, get into the trenches and perform physical work.
The size and complexity of your business will, in large part, dictate the extensiveness of your plan. In the more complex business, a written plan should be in place identifying the individuals and their roles, with alternatives if possible, with authorization given and the triggers for such a plan taking effect clearly identified. Emergency bylaws or operating agreement provisions should be adopted. Consideration of additional compensation of such individuals, whether directors, officers or limited liability company managers, as well as enhanced insurance coverages, including directors’ and officers’ coverages, should be contemplated. A duration for such state of affairs should be provided, with an exit strategy designed to preserve not only the value of the owner’s enterprise but also the employment stability of the workforce, thereby enhancing the enterprise value. That exit strategy is likely a sale, and in order to incentivize management, awarding bonus payments to help ensure the management team stays in place through the closing of the sale should be contemplated.
Whom to Designate?
For a smaller business, having one’s spouse, or if multiple owners one of the other owners, authorized to act unilaterally may be sufficient, but such authority needs to be provided for in a legally sufficient written document. Also, in the case of married persons, the likelihood of an accident where both are incapacitated or die is greater, and thus alternative authorizations should be considered as well.
For a more complex organization, while a spouse may, if appropriate, have some role as an owner’s representative, other individuals may also be able to act in such a capacity. The larger, more pressing issue is reassuring the management team. That comes about by advising that team, in advance, such that their roles and responsibilities are known and understood.
Such advance knowledge is critical. Questions always arise, some practical, some technical and some legal. Vetting the plan in advance of implementation makes the plan better, thereby helping to ensure a successful bridge to either the owner’s return to management or the sale of the business.
Integration of Estate Plan
While an estate plan is suggested as an absolute necessity for a business owner, the traditional documents composing an estate plan, e.g., a trust, will and power of attorney, are inadequate except for possibly the most simple of business enterprises. Even attempting to rely on the personal estate planning documents to continue any size business during the period of disability, during incapacitation or upon death is rife with problems. Planning for not only personal affairs but also those of the business should make you sleep easier knowing that your family, your business and your business’s employees will be protected.
Sometimes just a blank sheet of paper is best. Write down the issues you believe are significant or the questions you need to have answered. From there, discuss those issues and questions with your business attorney, who can assist you in crafting a plan that addresses not only those issues and questions but also many more that you might not have considered, all the while keeping an eye on tax efficiencies.
Over my 30-plus years of practice, I am always astonished by those businesses that have no plan of exit, whether that exit is on their timeline or due to an unforeseen, and thus not contemplated, situation or condition. Starting a dialogue is a good first step and you should know that there is no one-size-fits-all plan. While many issues will be common across businesses, your business and the issues you foresee are unique and need to be addressed in such a way that makes you and your family most comfortable.
If I or my colleagues at Sandberg Phoenix & von Gontard, P.C. can be of assistance, please contact me to arrange a meeting. Please contact me at [email protected] or 314.446.4278.