Preparing your business for your death

As I was preparing to leave for a BIG trip with my husband in February, I was doing a knowledge transfer with my colleague and it became abundantly clear that the only person who knows all the ins and outs of my business is…me. Even being in this after loss industry for years, I still had blinders on organizing certain aspects of my own life and business. Questions I had to quickly answer for my colleague before my big trip were:

What do I want to happen to my business if I die?

How would my current clients get notified?

Where is my business bank account located and how would she access it?

The unexpected loss of a business founder can have profound and far-reaching effects on a company. Recent studies indicate that such an event can lead to a drastic reduction in sales by up to 60%, a decrease in the workforce by 17%, and significant challenges, particularly if the founder was the face and heart of the business. And what can be more devastating is when the business owner was a solo-entrepreneur, meaning it was only them.

Estate Planning vs. Succession Planning

Succession Planning refers to the process of identifying the critical positions within your organization and developing action plans for individuals to assume those positions. While somewhat related, estate planning is the preparation of tasks that manage an individual’s financial situation in the event of incapacitation or death.
Simply put, succession planning involves the transition of people, estate planning seeks to avoid/minimize taxes and address liquidity/illiquidity matters. Business founders should address both forms of planning sooner than later.

You can begin by addressing these components:

  1. Identifying the Right Successor: Survey your current team and external experts to identify individuals who could successfully assume leadership. Consider factors such as alignment with your business’s values and vision.
  2. Establishing a Transition Plan: Outline a detailed plan for how your successor will assume your responsibilities. Include provisions for necessary training and familiarization with key stakeholders and operations.
  3. Addressing Legal Requirements: Update your will and review any existing buy-sell agreements to ensure they reflect your current intentions. Attend to any legal formalities promptly, as they are crucial in safeguarding your business’s future.
  4. Open Communication: Engage in transparent discussions with your family, key team members, and advisors regarding your succession plan. Clear communication can help mitigate potential challenges in the future.
  5. Obtaining a Business Valuation – A qualified business appraisal can assist you in estate planning by protecting the integrity of the transaction structure that you discuss with your estate planning attorney to transfer as much wealth out of your estate (at a lower tax rate) prior to your death. Spoiler alert: the amount of lifetime exclusion amount (the amount you can transfer to your heirs prior to death without incurring any federal income tax) will sunset at the end of 2025, declining from approximately $27 million to around $12-$15 million. A business valuation at date of death can also assist in the filing of a Form 706 Estate Tax/Inheritance Return.

Key Considerations for Business Continuity

In the midst of managing day-to-day operations, it is easy to overlook essential yet often neglected aspects of business continuity planning. Here are several critical points to address:

  • Emergency Contact List: Compile a comprehensive list of essential contacts for your business, including suppliers, key clients, legal counsel, and other relevant parties. Ensure this list is easily accessible to authorized personnel in emergencies.
  • Information Accessibility: Identify individuals who have access to critical information, such as passwords and the location of important files like leases, contracts, business registrations, etc. Ensure that this information is securely stored and accessible to authorized personnel.
  • Financial Contingency Plan: Develop a clear understanding of your business’s financial health and identify individuals authorized to access bank accounts and sign checks in your absence.

Sustaining Your Continuity Plan

A well-crafted plan is only effective if it remains current and aligned with your business’s evolving needs. Regularly review your succession/continuity plan and associated documentation to ensure they reflect the latest developments within your business.

Don’t wait. Take care of this today.

We always encourage you to start these conversations and actions as soon as possible. If you are needing help getting started, we encourage you to reach out to our blog contributor, Scott Womack with Mercer Capital, who is a nationally renowned business valuation expert specializing in a variety of industries and can help you and your business today with any business valuation questions.

**Disclaimer-this blog post is not intended to be used for legal or financial advice. We recommend you reach out to an attorney or financial advisor before taking action on any information in this blog.

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