Making Cents: Your business can survive your death
No one lives forever, but in theory, a business organized as a corporation or LLC could survive beyond your lifetime. This is one area that business owners frequently ignore until there is a problem.
The first pitfall is either not having a written succession plan or having one that is so old that it is ineffective. A succession plan should involve all stakeholders. That may include family and surviving dependents, partners, clients or customers and employees.
For partners, make sure there is a written agreement that covers succession for a few contingencies. The first would be not waking up for breakfast. The death of an owner with no succession plan invites battles with remaining shareholders and family.
The second contingency would be the disability - temporary or permanent - of an owner, either a temporary or permanent one. In many ways, this could be more harmful to the business than the death of a shareholder.
The last contingency would be a partner wanting out of the business.
People get burnt out, want to retire or desire a major change in their lives. A written agreement with fellow shareholders must address this possibility.
Valuation of the business is another common pitfall. Many written agreements between owners are vague or poorly drafted when it comes to the pricing and payout of an owner's interest. The worst kind of valuation language asks that an outside accounting firm value the business or suggests that several valuations are obtained, with an average of them becoming the actual price. A better way is for the shareholders to agree each year on a current valuation should any contingencies occur during the coming year.
Beyond valuation, funding for the buyout is a sticky issue. Many have insurance policies to back up the agreement, which is a good thing. But frequently the policies are inadequate or owned in such a way as to trigger tax consequences that may differ from your understanding. The insurance obtained should cover both death and disability, and match up with the terms of the buyout.
Inadequate funding is frequently the kiss of death for the business, the survivors of the deceased and the remaining shareholders. Many businesses can't afford to stay in business following the death or disability of a key shareholder.
John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at email@example.com.