6 Reasons Basic Estate Planning is So Important for Business Owners

In general I am not a fan of “listicles”.  They feel like a cheap, click-baity, headline grabbing way to produce content and drive traffic to your website.  Reading them can feel…yucky.  So I typically try to avoid publishing them.  I care greatly about the integrity of this site, and avoid content that I don’t think is genuinely valuable.

Recently I’ve run across a number business owners who’ve done ZERO estate planning.  No idea who steps in to run their business if they’re not around.  No will.  No trust.  Nothing.

This is pretty common, unfortunately.  Hundreds of thousands of small businesses out there have done no estate or succession planning.  A study of 200 by Wilmington Trust found that 58% had no plan in place whatsoeverI’ve written on this subject recently.  Because this is such an important topic, I’m going to break my rule about listicles today to drive the point home.  (Hey, in moderation they can be an effective way to communicate.  Who doesn’t like digestible, bite sized snippets?).

Here are my top six reasons estate planning is so important for business owners.


 #1: You & Your Family Probably Depend On It

For most business owners I speak with about financial matters, a substantial portion of their net worth consists the equity in their business.  And when I say substantial, I mean up to 75-80%.  Without any type of plan in place, there’s a very high likelihood that the value of this equity dissolves entirely if you become incapacitated or die unexpectedly.

Even if you have a long term disability insurance policy in place, losing the equity in your business would probably have a significant financial impact on your family.  Having a succession plan in place in just in case something does happen is the only way to preserve your equity.  And therefore your family’s balance sheet.


#2: Your Business May Not Continue Without You

If you’re not around to run the day to day operations tomorrow, who would step in?  Do you have managers who can run the show indefinitely?  Is there a formal org chart with clear instructions on who fills various roles?  I’d guess your business is driven it’s leadership: you.  You are probably responsible for your company’s vision, mission, and general operations.  These are big shoes for your staff to fill, and they may not be ready, willing, or able.

On top of that, your company probably has a lot of stakeholders who will also be affected.  If things go south your staff may be out of their jobs.  Your customers may be on their own, and the community around you could be adversely impacted.  Planning for this kind of event – expected or unexpected – could very well save your business and preserve the livelihood of those you care about.


#3: It’s an Opportunity to Direct Your Estate

Estate & succession planning are often lumped together in the small business world, but are actually two different concepts.  Succession planning covers who will run your business (and how) if you’re not around to do it yourself.  Estate planning covers how your assets and liabilities will be passed on once you die.  Even if you have a solid succession plan in place to preserve the equity in your business, most people have specific wishes as to who will inherit their assets and how.

For example, you may have an estate that you think is relatively straight forward.  You have a partner who can fill your shoes on the leadership team, along with a buy/sell agreement to fund a buyout if you die prematurely.  You’re married and have two kids in their early 20s.  If you die, everything goes to your spouse.  Your kids are 50/50 contingent beneficiaries, in case your spouse is not around to inherit your estate.

How good are your kids with money?  If they’d be in line to inherit a couple million dollars, are you comfortable with their ability to handle it responsibly?  Do you have other family members or causes you’d like to leave something to?

Even in fairly basic cases, a formal estate plan enables you to specify your wishes in a legally binding way.  You could create a trust that disburses a portion of your estate every 5 years.  You could create conditions your beneficiaries must adhere to before receiving their share.  The choice is yours, but the only way to formalize your wishes is by doing some estate planning.


#4: Some Debt is Called When You Die

Many business owners have lines of credit for business operations.  Some may be collaterized with business assets, others might be taken out in their own name.

It’s not uncommon for credit lines to have clauses that require payment in full if a business owner dies prematurely.  This can easily jeopardize the business, as payments may be due before your estate has latitude to pay them.  A good succession plan incorporates all your assets and liabilities, and specifies what funds or other assets are to be used to repay such debts.  Without a plan in place, paying off large debts on short notice can be a massive chore for your staff and/or family.


#5: It’s an Opportunity to Promote Your Values

Not only is estate planning an opportunity to specify who gets what & how, it’s an opportunity to promote values that are important to you.  One of my favorite lines about entrepreneurship is that it’s the best opportunity we have to make a substantial imprint on humanity.  (I’d credit the author if I could remember where it came from).

Most successful business owners I’ve met structure their companies’ values as an extension of their own.  They have a clear view of the world as it exists today, a clear vision of what it could be, and spend much of their energy bridging the gap through entrepreneurship.

An estate plan is a way to continue promoting these values after your death or incapacity.  Some people go so far as spelling out their personal values in a trust, and nominating a board of trustees to manage the trust’s funds upon their death.  The board’s responsibility is to determine whether the actions of the beneficiaries comply with the spirit of the trust – with it’s sole purpose being to promote the values that you believe in.


#6: It’s an Opportunity to Manage Taxes

And finally, we have good old Uncle Sam.  Our mascot.  Our friend.  Our business partner.  For those of you who do have a substantial portion of your net worth tied up in your business’s equity, a succession will mean a large taxable event.  In fact, it’s probably the highest tax bill you’ll have in your entire life.

If none of my five other reasons resonated with you, please, at the very least, do some advanced planning to minimize your tax bill.  You’ll owe tax when selling your business one way or another.  Thoughtful planning just gives you more flexibility.  You have the option of a stock sale or asset sale.  You can structure some sort of earn out over several years to stay out of the highest tax brackets.  You can determine the ultimate sale price by revenues in the years you depart, to take risk away from the buyer.

There are many choices and ways that deals can be structured.  The point here is that none of it will matter if you don’t plan in advance.

Posted in Business Ownership, Entrepreneurship, Succession & Estate Planning and tagged , , .

One Comment

  1. Starting a new business is a very exciting time for entrepreneurs with future success in mind and having a start-up team of trusted financial and legal advisers is one of the key ingredients to future business success. And estate planning is one of the most important tasks in business life.
    Thanks for sharing this helpful information!

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