Most entrepreneurs assume their business will go on forever, even after they are gone.
Sometimes the plan is to eventually sell the business or pass on the reins to a family member or another entrepreneur.
Then there are also business owners and solo entrepreneurs such as bloggers and freelancers have no partners or employees.
Can the “solo entrepreneur” plan for business continuation when no one is being groomed to take over the reins?
Below you’ll learn why every business, even a single man (or woman) operation, needs a succession plan, and three simple ways to make that happen!
Why Your Business Needs A Succession Plan
Life happens whether we like it or not. Without getting grim, you may face a life-altering event at any point which may make it difficult, if not impossible to run your business.
What would happen to your business in the event of you or a partners unexpected passing or a life altering disability?
Would your family or heirs have any clue what to do with or how to keep your business running?
In a time of stress and emotional upheaval would they be able to or know how to run or even sell your business?
And even if they did know how to do these things, would they even want to?
Assuming they can’t or won’t by following the three steps below, you can create a plan of attack for them to follow to ensure that your business continues on and provides for your loved ones.
Part 1 – The Minimum Viable Plan
This step is the cheapest (free!) but also probably the most time consuming. While following all three steps is highly recommended, please at the very least take the time to do this one step!
The Minimum Viable Plan is simply an outline of what your chosen successor should do to keep the business alive or alternatively how they should dispose of it.
The plan can be anything from a simple letter to a video, PowerPoint or beyond. It is up to you. The more detailed and easy to understand, the more likely your wishes will be followed. Share a copy with your loved ones and keep backups in safe secure locations.
Some key things to include in your letter (or other form of communication):
Your plan of attack: What do you want to happen to your business? Should your spouse or successor continue on or perhaps sell it? You may already know what you want to happen or you may want to let them decide what’s best at that time for the family to move forward.If you have a Partner(s) I highly suggest you contact a business attorney so you have a buy/sell agreement in place. If not you can amend your operating agreement to ensure the proper succession provisions are in place, the transition is smooth, and your family is compensated their (your) fair share. If you are a solo entrepreneur, you can still have these sections in your operating agreement or provide all the details in the letter.
Fill in the details: While the letter should include what you want to happen to your business, you can’t stop there. You need to include all the details so they can access your business and move forward. Some important things to include:
Key customers, clients, relationships, and business partners/referral sources/vendors.
How to access your most important files, passwords, how your computer system works, etc.
Name a successor or someone to temporarily take over the business that you feel confident in and is trustworthy. Naming a backup successor is also highly recommended.
Action steps or immediate things they must do to keep the business going. A checklist of you or your assistant’s most important daily or weekly tasks that keep the business running would be great here.
Key Performance Indicator Metrics, P&L’s, Financials, Invoices, etc. Just like you, your successor will need to know the numbers!
Congratulations! If you have taken the time to complete this one step, you are way ahead of the game.
Part 2 – SET UP A TRUST
Trusts for some reason have a scary overtone to them. In fact they are just legal documentation that lays out the rules you want to have followed for the property you put in the trust.
While trusts can vary from simple to absurdly complex, they don’t have to be a headache or cost a fortune.
In most cases you will likely save thousands of dollars keeping your business and other assets out of probate than you would ever pay an attorney to set up a trust.
Wait, what’s probate???
Probate is where the government disposes of your assets as they see best, not as how you would have wanted. To top it off, probate proceedings often end up spending tens of thousands of dollars from your estate just on legal costs and proceedings alone (check with the rules of your state, rules, fees, and proceedings may vary).
Especially in California, Probate proceedings are costly, often take at least 9 months to resolve (or longer), and are generally a dumpster fire. While, having a trust wont guarantee your estate entirely avoids Probate, it can help to dramatically minimize the financial burden and time spent on the process.
That’s money your loved ones won’t get and added stress and work for them that they shouldn’t have to go through.
To make matters worse Probate is a public proceeding. This means everyone will know where your assets went and who to prey on for their inheritance!
So how would a trust for your business work?
While there are many options depending on the size and nature of your business a simple example would be:
Name the trust as the owner of your business – Your attorney should be able to accommodate this regardless of the current corporate structure of your business. If you are in a partnership or are a shareholder, you can have the trust own your portion or share of the company.
Name yourself as the trustee – As long as you are alive and have capacity to function, you retain control.
Name your spouse, loved one, or successor in the business as successor trustee – This is the person who will make the decisions for the property held in trust (your business) upon your death or incapacity. You can also name a co-successor trustee if you want someone to assist your spouse with transitioning or selling your business.
Plan with your attorney on your goals, wishes and what you want accomplished for your business when you pass or if you become incapacitated.
This is a very simplified version of the process. However, meeting with a qualified Estate Planning Attorney will help to explain the process in full detail. You can expect to have a few meetings with the attorney but overall setting up the trust should not take much time and you will feel a great sense of relief when you are through!
Ultimately, your Estate Plan should be tailored to your business, desires and needs. While this takes a bit of time and money, it is the safest way to ensure your plans are carried out. You can also consult with your Business Attorney on this. He may be able to do it himself or refer you to a trusted colleague.
Also, remember that the money you spend now will help save your loved ones a ton in the future by minimizing probate and ensuring that your business is not held up by the probate court.
Part 3 – COVER YOUR A$$ WITH INSURANCE
So you have your letter with instructions. You took the time to set up a trust. You are an all star. However…
Perhaps your family depends on money from your business that could be reduced or held up upon your death or incapacity. Insurance will provide quick access to funds to keep you or your family going until things are sorted.
I’m clearly not involved in the insurance industry. I do know quite a few knowledgeable and reputable agents though. While you may not want to have life insurance, it is a good way to protect your loved ones when you are gone. If you already have life insurance great job! But…
You should highly consider disability insurance. Perhaps you need to use your hands for your profession. I certainly do. However, I also love snowboarding, playing sports and leading an active lifestyle.
If I were to become disabled and unable to work/type, it would be game over. Disability insurance is a way to ensure you can have income while you are disabled. The younger you get it the better off you will be.
You never know what tomorrow will bring, with proper insurance you can keep your business afloat till you are recovered or provide additional income to your loved ones so they are not stranded.
If you have a business partner or partners you should also consider formulating a Buy-Sell agreement. Generally speaking, this document, drafted by your Business Attorney, sets out the ground rules for how to sell or pass on one partners share of the company.
This would apply to situations such as if they were forced out of the company, become incapacitated, or pass away. The Buy-Sell can be funded by taking a life insurance policy out against the other partner and upon their disability or passing the other partner could use the life insurance pay out to buy the deceased’s shares from the estate. The partners could also fund it by loans, or individually.
However, this is an extremely simplified explanation, and the Buy-Sell is much more nuanced than this brief explanation can provide. I will cover this topic in depth in an upcoming post.
Again you should discuss your options with a qualified and trusted agent. As well as with your Business Attorney. Insurance may be the third part, but it will cover your a$$ when you need it most.
Thanks for making it this far. By now you should realize why you need a plan and what’s at stake!
You also learned the three parts of a plan to ensure your business succession goes smoothly.
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Leave a note in the comments about what action step you will take today! If not let me know why not, what the pain point is, or what your fears are if any. Thanks!
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Disclaimer: This blog discusses general legal issues, but it does not constitute legal advice in any respect. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Reading or relying on any such information found within this blog in no way, shape, or form creates or constitutes an Attorney-Client Relationship. The author and his firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this letter.
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