How to Create an Estate Plan
For most entrepreneurs, their biggest asset is often their business. Taking steps to protect that asset now is one of the smartest things you can do as a business owner. Here are some lessons in Estate Planning 101.
Estate planning is one of those things everyone dreads and tries to avoid, but without it, your business could suffer, or even fail, if something were to happen to you unexpectedly. For that reason, it's never too early to start thinking about estate planning. After all, it's likely that as the owner of a small business, the success of your company is the main source of your economic stability, and it would be foolish not to plan for the future of your company. Just as we think about our personal future – what is the next house or car we want to buy, where will I go on my next vacation – so too must entrepreneurs think about the future of their business estate. While an estate plan may develop over several years, and is constantly changing based on the state of your business, fortunately there are steps you can take now to ensure a successful future for you and your company.
How to Create an Estate Plan: Preliminary Preparations
Estate planning is not just crucial in the event of a death, but can be helpful should a partner in a multiple-ownership company want to take his or her exit. Without a plan in place for how various scenarios should be dealt with, the continuity of that business can be compromised. The first step to smart estate planning is to think about succession. At a privately-held company, the succession plan essentially serves as the road map to the owner's estate. The question of succession can take on many forms. Many entrepreneurs hope to see their business continue to exist after they are no longer alive. In that case, you will need to choose a successor, someone you not only trust, but who you can groom to carry out your wishes for the company.
Choosing a successor is a process in itself that should be carefully thought through. If you don't plan to have anyone take over your business when you're gone, the other option is to sell. Whatever your decision is for the fate of your business, you'll want to make that intent clear with your family and any colleagues or shareholders that might potentially be involved in the future of the company.
Dig Deeper: Choosing a Successor
"The more closely held the business is, the more options you have for estate planning," says Gregg Delman, an independent attorney with experience in the estate planning field as well as financial planning and investment management. "If you are the sole owner and founder, the decision about what to do with the business is all yours. But, if you have partners or co-founders, you will need to have the discussion with them about the future of the business." Typically when a business has multiple partners, a buy/sell agreement will be set up to determine how the shares of the deceased owner will get distributed. In a buy/sell agreement, the remaining partners or shareholders have the right of first refusal for the decedent's shares. After that, the shares can be offered to outsiders, often the decedent's family, or someone else who is interested in retaining ownership of the company.
Mark Gotlieb, an attorney at Miami-based Gotlieb and Associates, which specializes in international estate tax and estate planning, recommends that business owners take out a life insurance policy on themselves. When the life insurance is paid out on a deceased business owner, the remaining partners can use the money to pay the entrepreneur's estate for his or her shares of the company. "In general, entrepreneurs should make sure that they have a life insurance policy in place should anything happen to them," says Gotlieb. Getting a life insurance policy and setting up a buy/sell agreement are both essential parts of the estate planning process. If you are already working with a financial planner, they can help advise you on your options for securring these documents.
Dig Deeper: Understanding Life Insurance
Once you have determined your succession plan and set up a life insurance policy, which states your individual worth, the next step is to find out what your company is worth. "It's important to have a business valuation, particularly if you have set up a buy/sell agreement, because that will determine what the liquidation price of the business would be and what your heirs would be owed on the estate," says Delman.
According to Delman, it's best to work with an independent auditor or appraisal firm that is familiar with your industry in order to get the most accurate value on your business. The complexity of this process will vary depending on how long you've been in business as well as the type of industry you are in. Additionally, the value for businesses in certain industries will fluctuate. For example, 2009 was a particularly lucrative year for companies in the manufacturing industry. If you want to get a rough idea of what your business is worth, Inc.'s Valuation Guide features an interactive tool to help you calculate the number on your own, which can be used as a starting off point in your planning.
Dig Deeper: Inc.'s Guide to Business Valuation
How to Create an Estate Plan: Taking Stock of Your Business Assets
Knowing the value of your business will also help facilitate the next step in the process: surveying all the various facets of your business that you depend on to keep your company running. This will include any third-party vendors and merchants that you work with, your company finances and bank accounts, employee insurance policies, software programs and passwords, essentially anything of value when it comes to the continuity of your business.
Delman suggests making a list of all of your business assets, their function, and who has access to them. "Put together a guide that has all the keys to the kingdom," he says. It really helps to have all of this knowledge in one place and accessible. Go over the document with a family member and/or a business partner you trust, and make sure that there aren't any unanswered questions. It is especially important for smaller Web-based companies to go through this exercise, says Delman, because often times the owner will be the only one that has access to important company information. Without a plan for how to pass on that information in the event of an unexpected death or incapacitation, a legal mess could ensue.
