August is National Make-a-Will month and it should serve as a reminder for small business owners to have their succession plans in place.
Often it’s hard enough to coax small business owners into writing an initial business plan when they’re starting out and it can get even more difficult to make them seriously consider putting a plan in place for their end game.
Sadly, the consequences can be disastrous. For example, my parents owned a small business and probably intended to sell it to a key employee. It would have been the ideal situation. However, they waited too long, the employee left and became a competitor. Illness struck my family and eventually they were backed into a position where they were forced to sell. Consequently, they sold for pennies on the dollar.
Succession plans differ wildly and perhaps a will is not the best legal vehicle to handle your small business. There’s no doubt that you will need some professional advice to finalize your plans, but here are a few concepts to get you thinking about the subject.
Living trusts for small business
Living trusts can be the right way to go for some small business owners. Small businesses often have assets that fit into a living trust arrangement quite nicely. For example, many small businesses own property and living trusts are often used in this situation. Further, some small businesses will own patents and copyrights. Again, establishing a small business living trust can be the right strategy.
Sole proprietorships, partnerships and closely held corporation interests can generally be transferred to a living trust fairly easily. However, if you’re involved in a limited liability company (LLC) you’ll need a majority of the owners to agree. Please get a good estate attorney to go over all your options in detail.
Also, if you have a small business that operates in more than one state, going the living trust route can spare your heirs the hassle of dealing with probate courts in different states.
Establishing a trust generally means that you plan to pass on ownership of your small business interests to your heirs. However, many small business owners are best served by selling their businesses as they are approaching their retirement years. Often family members don’t want to continue the business.
Selling a small business
I hope that the story I told at the top made an impression on you. If you plan to sell, you need to have that goal on your mind and be working on it for many years prior to your retirement.
To put it simply, you need to build value and find a buyer. Fail at either of those to items and you’re out of luck. And while it’s fine failure at a few startups when you’re younger, it’s tragic to fail at achieving a successful small business sale when you’re older.
So take National Make-a-Will month as a gentle reminder to be actively planning your exit strategy. You’ll be extremely glad you did.