This article was co-authored by Paul Lally, Principal at Wipfli LLP, and Dean Stange, Principal and Senior Financial Advisor at Wipfli Financial Advisors, LLC
Traditional business transition planning tends to focus on the retirement of the owner and how their business might transition to their children, other partners, key employees or third parties.
What many owners overlook, however, is how to protect the business in case of an unforeseen event such as the sudden disability or death of the owner.
What if you became incapacitated or died unexpectedly today? Do you have a plan in place to keep your company operating smoothly or transition it responsibly? Who is in place, and are they prepared to make those decisions if you are gone?
A plan that only considers what may happen many years down the road is not a complete plan.
What to include in your transition plan
While it can be difficult to consider the possibility of your unexpected death, the consequences for your family, wealth and business can be devastating. The last thing you’d want after building and growing your business for as long as you have is for it to fail after your death.
So how can you plan for the unexpected? There are two main parts to planning: legal documentation and delegation of day-to-day responsibilities.
1. Legal documentation
The legal documents that carry out a plan should include the identification of successor management and/or owners, the owner’s will and/or trust, a buy-sell agreement, etc.
The key here is to make sure the legal documents actually carry out the plan. We see too many estate plans that are generic in nature and don’t include specific provisions for the business.
Consider these two hypothetical examples:
Example 1: John and Kristina, ages 55 and 52, own a manufacturing business that John runs. They have wills that pass all their assets to each other and then to their children in equal shares. None of their children are involved in the business. The business constitutes 60% of their net worth. John dies unexpectedly. What is Kristina supposed to do as the surviving spouse? Who is going to run the company until it can perhaps be sold? Even though they have wills, no one knows what to do from a business perspective, as she and John never talked about it. Additionally, the key management team was never prepared to take over upon an unforeseen event.
Example 2: Emma, age 70, owns a distributor business that she runs. She has a will completed 15 years ago that passes her assets to her three children in equal shares. Her oldest child, Emily, is slated to take over the business. The business constitutes 60% of her net worth. Emma dies. Everyone at the business “knows” Emily is the successor, but this relatively common fact pattern could lead to a mess between Emily and her siblings because she has no right in the documents to purchase the company or receive it by other means. Emily may not be happy to continue management of the company long term if her siblings own two-thirds of it and refuse to sell to her.
2. Day-to-day responsibilities
For your plan to work, you as the owner can’t be the only contact for all the key supplier, customer, legal, tax and banking relationships. If you are, the value of your company may be greatly diminished or even nonexistent in the case of your sudden death.
Who can step into the practical day-to-day issues if you’re gone? Who can step in to make key management decisions? There needs to be a plan of continuance for the day-to-day operations of your company, with identified successors in place who have been trained to act.
Example 3: Jake, age 70, owns a very profitable mid-sized factory. He has a will that instructs that the business should be sold in the case of his death. Jake died unexpectedly, but no one had a relationship with the key suppliers or the company’s accounting firm or attorneys. Jake planned to start introducing his management team to these key people, but never “got around to it.” No one knows what to do, and there are critical decisions that need to be made.
Ready to start your business transition planning?
The purpose of planning for an unforeseen even is to allow your business to return to its daily operations as quickly as possible. A viable plan protects resources, minimizes customer inconvenience and identifies key staff — assigning specific responsibilities to help with the recovery.
By creating a plan that encompasses both succession planning and transition planning, you and your company can better understand your business, discover shortcomings and find ways to improve (including how to increase business value). Furthermore, the plan demonstrates to your employees that the company is prepared to protect their well-being.
An unplanned situation involves numerous, powerful dynamics that require many people to work together to produce a positive outcome. Putting the right people and resources in place ahead of time is essential to mitigate negative consequences, and managing the situation properly and addressing the strain on stakeholders will allow for the maximum preservation of value.
Wipfli can help you create a business transition plan that takes into account the unexpected as well as your future retirement needs and goals. Talk to us to get started.
Sign up to receive additional business topics — including how to grow and protect your wealth — in your inbox, or continue reading on:
How to modernize your business transition plan
Succession planning starts with transferability
How to crisis-proof your succession plan
What is a GRAT, and why is now a great time to set one up?
Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at www.adviserinfo.sec.gov. Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.