Death taxes and selling your business. As 2020 has thankfully ended and you continue to plan for 2021, one of the most important questions you need to ask yourself is: Am I and my business prepared for the unplanned?
As we all learned in 2020, the unplanned will pop up suddenly. A global pandemic, an economic shutdown, and even a workforce suddenly working remotely.
What should I look out for when selling my business?
On a microlevel, as business owners, we have had to deal with employee dislocation, loss of key customers and / or supplies, decisions on what to do with office space, sales of businesses grinding to a halt, along with a whole host of other issues.
As a business owner, every year has the potential to throw you a curve ball of unforeseen and unplanned problems. While we cannot control these unplanned events, we can take steps to mitigate their impact.
If you have a well thought out AND documented Exit Plan, as well as an up to date Personal Financial Plan that is integrated with your financial plan you can stop reading.
If you do not, you will want to read on. Here is why:
Statistically, 48% of all businesses sold in the US each year are unplanned sales. The top 5 reasons businesses are forced into unplanned sales are:
- Death of the owner
- Disability of the owner
- Disagreement between partners
- Distress in the business, generally from unforeseen events
An unplanned sale is destructive to the value of your business and to family wealth. In the case of death, it adds another layer of pain and confusion to an already grieving family. It is another complication to deal with during a divorce or disagreement with a partner and can add another layer of stress in the event of a disability.
Will having an Exit Plan help me avoid these pitfalls?
While having an Exit Plan cannot help you avoid any of these value destroying events, a well thought out and integrated Exit Plan and Financial Plan can provide a roadmap and resources to address the impact of an unplanned event.
A well-constructed Exit Plan should contain a brief but detailed contingency plan that guides the owners family, professional advisors and business partners on what the owner would like to happen with the business if they can’t do it themselves.
Without a well thought out contingency plan, the consequences to employees, customers, vendors and the owner’s family and estate can be dire.
At a high level, a contingency plan should include the following:
- A directive on who steps in to manage the business day to day
- List of your professional team to assist with the transfer of ownership
- List of key documents and where to locate; for example:
- Living will
- Insurance policies
- Your desire for the disposition of the business
- List of possible buyers
- Goals to be achieved with the proceeds of the sale
- Key employees
What about for death or disability?
In addition there are certain steps we as business owners can take to mitigate the immediate impact in the event of death or disability that need to be documented and road mapped for proper execution in your absence, be it temporary or permanent:
- Stay bonus plan to keep key employees from leaving in the face of uncertainty
- Life Insurance in place to fund
- Buy – sell agreement
- Stay bonus
- Hire Executive to run the business
- Disability Insurance that pays your salary so the business can have flexibility to hire the skill set required in your absence
- Personal Disability policy to ensure the owner has income without placing additional burdens on the business.
We will explore details of each of these options in a future article.
Recognize that by choosing to decide not to explore now how an Exit Plan could benefit you and your business, you are choosing to allow chaos and confusion to take over your business in your absence.
At a minimum, developing a contingency plan is a prudent risk management step to take in the evolution of your business.
Also, it is important to understand that an Exit Plan is not just for the sale of your business. It is an ongoing strategic process that increases the value of your business, protects against unforeseen risks and keeps you, your family and your business protected and prepared for the unplanned.
The worst legacy you can leave your employees, your clients and your family are the headaches that come with trying to resolve all these issues without your help and guidance.