When we do estate planning for business owners, our plans generally include some discussion of business continuity plans. This article sets out how we think about this.
A brief internet search will turn up many articles on business continuity planning. The government focuses on preparing for floods, hurricanes, earthquakes, or pandemics. Others more on IT. Some have at least some discussion of planning for the death or incapacity of an owner, while others ignore it entirely.
We don’t know any more than the next person about how to prepare for a flood or IT problem, but we do know something about planning for death or incapacity. Some of that work is part of the estate planning process, and some is internal business continuity planning that should be done by the owners in addition to the estate planning process.
How Estate Planning Fits
An estate plan for a business owner is designed to cover three key items. First, all estate plans will include powers of attorney for finances. This allows someone else to step into shoes of a business owner who is living but incapacitated. The power of attorney has legal authority to take all actions the owner could take, including actions related to the business.
Second, if the business has partners, the estate planning process will include creating a buy-sell agreement for the business. This defines the circumstances under which a deceased or incapacitated owner may be bought out of the business, and sets out a process for valuing the business and completing the transaction.
Third, the business owner’s estate plan (i.e. will or trust) may dictate who receives their ownership interest if the owner dies. Or, it may create a process for some other resolution, such as a sale. The document will appoint an administrator with legal authority to carry out the process.
How Continuity Planning Fits
When a business has one owner, estate planning creates legal authority, but leaves flexibility as to what should be done with it. For example, a common plan for a married business owner who is the sole owner of the business will name the spouse as power of attorney. The document gives the spouse legal authority to manage the business. But what should the spouse do with that authority? The document does not say. This is where continuity planning fits in.
Similarly, if an owner dies suddenly, the estate plan will appoint an administrator who has authority to manage the business for the benefit of the owner’s heirs. But in many cases the document does not specifically say what the administrator should do with the business. Should the business assets be liquidated? Should the business be marketed and sold to a third party? Is there a key employee who can manage the transition? Again, this is where continuity planning fits.
What To Include
Generally, the smaller the business, the more business functions are known only to the owner. On one side of the scale, a sole proprietor running her own painting company is the only person doing sales, production, and finance. If she unexpectedly dies or becomes incapacitated, her business succession plan might be extremely simple: call a trusted competitor to finish up her jobs, sell her equipment, pay any bills, and close up shop. Businesses like this are, in a sense, the easiest businesses to deal with in a continuity plan. The plan might consist of a list of assets, a place to look for a list of existing jobs, and a trusted contact who could wrap up existing jobs.
If a business has value as a going concern, however, the goal is to preserve that value. To preserve the business as a going concern, someone must be able to perform the business functions that the owner no longer can, and to transition the business to its next owner.
Based on all of this, we believe the continuity plan should include the following information:
A recommendation on whether the business should be liquidated or sold as a going concern. As discussed above, some businesses are not designed to survive the death or incapacity of the owner, and should be liquidated. Others can and should. The owner should advise in writing which type of business she believes this is.
If the business should be liquidated, key items to be aware of. This would be existing work and who could be relied on to finish it up, likely buyers for any unique assets, and any other information a person would need to effectively liquidate the business.
A list of key business functions that only the owner knows how to do and how to handle them. If the owner is the only employee handling finance, for example, key financial tasks should be listed and instructions provided. This is a useful exercise for many reasons.
A list of the owner’s key business functions that could be performed by others, and who would serve as a backup for each if the owner is unable to do so.
Who should be in charge of day to day operations.
Who the owner’s trusted advisors (banker, attorney, accountant) are.
Other key contacts who would be involved in some way.
If the business will be sold, are there any potential internal buyers (i.e. key employees)? Known likely outside buyers who should be consulted?
If the business will be sold, a range of likely values and why the owner believes those values are valid.
Any other key facts the owner believes the successor should know.
A simple downloadable Word template is below. We recommend that all business owners fill out this template and let their financial power of attorney and perhaps key employees know where to look for it. We also recommend they review and update this template once a year during the annual planning and budgeting process.
Own a business and need an estate plan? Contact us to schedule a no obligation consultation. We will look forward to meeting with you.