Jan 05, 2012 01:33 PM
Business owners devote much of their time to building their business and improving their profitability; however, they often neglect to devote time to protecting their business by addressing succession considerations and asset protection. Business owners should consider the following: 1) Preparing for business succession in the event of death, and, 2) How to implement business agreements designed to protect and enhance business value while providing for seamless succession in the event of incapacity, retirement or departure from the business.
Succession Considerations
If you co-own a business with others, such as a partnership, LLC or corporation, you will want to sign a buy-sell agreement, or buyout agreement, with your co-owners, that will control what happens to your ownership interest when you die. Some owners agree that the business should have the opportunity to buy your share of the business back from whoever inherits it. A buyout agreement can even call for the company to purchase life insurance on the owners so that it can be used to fund the purchase of a deceased owner’s interest, turning the buyout agreement into a business continuation plan. Other business owners want to keep the business in the family, and in that case the buyout agreement can be turned into a succession plan.
Business owners should also consider preparing a will or trust to dictate what happens to your business interests in the event of a death. Through a will, a business owner states their wishes about who you want to inherit the business, and dividing the business assets up however you see fit. If you don’t leave a will with directions about who you want to own the business, state law does it for you and usually close family members will receive everything. The rules vary from state to state, but generally surviving spouses and children share the estate.
If you’re not married and don’t have offspring, assets will go to your parents or siblings. Writing a will gives you the chance to name someone to serve as executor, to carry out the terms of your will. That person will be in charge of gathering your assets, paying debts, filing tax returns, and eventually distributing your property in the way you directed. That can be a big job, particularly if you leave a business behind.
Although a will is a great start for anyone who’s decided it’s time to do some business succession planning, a trust can also be a very effective succession tool. A trust lets your family avoid lengthy and expensive probate court proceedings after your death. Assets in a trust can be transferred quickly to the people who inherit them, a big advantage if you want a business to keep running smoothly.
Asset Protection
There are basic legal documents that should be considered by business owners to protect business value including a non-compete and confidentiality agreement, buy-sell agreement, and perhaps even a deferred compensation or bonus plan for key employees or associates. There are very few events that can severely affect the value of a small business such as a key employee or associate leaving the business and starting a similar business, an employee departing with trade secrets, confidential information or even customer lists. All business owners should require their employees to sign non-compete and confidentiality agreements to prevent an event like this from occurring. If the terms of such an agreement are considered reasonable under state law, the agreement should be valid and enforceable.
A buy-sell agreement accompanied by proper planning should provide the exiting owner a fair value for his or her ownership interest while providing the remaining owner a means to purchase the exiting owner’s interest without depleting the business of cash flow and its value. It is crucial that planning be done to ensure there are sufficient funds available to implement the buy-sell provisions when triggered. Funding at an owner’s death with life insurance may be the easy part. More problematic may be how to buy-out a departing owner’s interest in the event of disability, retirement or voluntary termination, especially if a portion of the business’ cash flow must be devoted to that purpose. Further, once in place, a buy-sell agreement should periodically be updated to reflect changes in the business value and the owners’ objectives.
Finally, business owners should consider putting into place a deferred compensation or bonus plan designed to reward key employees or associates who meet certain performance targets. This in turn serves as a valuable tool for asset protection. A well planned deferred compensation arrangement can serve two purposes. First, the plan can be designed so that employees are rewarded for achieving benchmarks that not only protect but increase the business value. Second, such agreements, for example through gradual vesting schedules, can place so called “golden handcuffs” on valuable employees or associates by making it extremely difficult for them to leave the business without forfeiting very important benefits.
As important as it is for a business owner to develop their business and increase their bottom line, succession planning and asset protection are also very important considerations in protecting your business value. Consult a business attorney to help you plan for the future of your business and your family.
Sumeet P. Shah is Of Counsel to Neera Bahl & Associates, LLC and Principal Attorney at Shah Legal Group, LLC. His areas of practice include franchise, corporate, real estate, estate planning and business litigation. He can be reached at sumeet.shah@shahlegalgroup.com.
