Achieving success in business demands careful planning, dedication, and a well-thought-out strategy. For many startups, it often takes two to three years to begin generating profits. This is why protecting your business is so important for safeguarding your accomplishments.
If you’ve built a business, you understand that success doesn’t come overnight. But have you considered what would happen to your business if unexpected events occur or when you decide to step away?
At some point, you will need to exit your business. By integrating your business into your estate plan now, you ensure a smooth transition and protect your family’s future. Succession planning goes beyond simply preparing for emergencies — it’s an integral part of your long-term growth strategy.
One-Third of Business Owners Are Unprepared for Succession
Entrepreneurs often share key traits like motivation, creativity, adaptability, and a tolerance for risk. They also tend to think long-term, with a broader outlook than the typical 9-to-5 worker.
However, many business owners prioritize the immediate demands of daily operations over planning for future leadership transitions. According to a 2024 survey by Edward Jones, this lack of foresight is common.
Over half of U.S. business owners are now over the age of 55, with most planning to transfer ownership around age 63. As they approach retirement, the country is poised for what Edward Jones has dubbed a “business succession boom.”
Despite this, only two-thirds of business owners have developed a formal succession plan. The remaining one-third haven’t taken action, often due to uncertainties about their business’s future (32%), lack of clarity on how to start the process (32%), and difficulty identifying a successor (26%).
What Happens When You Fail to Plan
Despite the uncertainty around why business owners avoid creating a succession plan, the survey shows that 88% of owners remain confident their businesses will grow over the next decade.
With a solid succession plan, that growth could be even greater. Research from the Harvard Business Review indicates that proactive succession planning can boost company valuations and investor returns by 20% to 25%.
Whether you plan to sell your business or pass it on to your heirs, developing a leadership pipeline with clear succession practices is essential. This step is highly important for your overall business strategy, enhancing both continuity and long-term value.
However, about one-third of entrepreneurs lack a retirement savings plan, and 20% intend to sell their business to fund retirement. Successfully executing a sale takes time, with experts recommending a minimum of three years for preparations. Optimizing revenue, streamlining expenses, and organizing financial records and management all take time.
It’s also important that your succession plan accounts for the unexpected. Nearly half of business exits are involuntary, caused by one of the “Five Ds”: Death, Disability, Divorce, Distress, or Disagreement.
For example, if your estate plan doesn’t include business succession planning and you pass away unexpectedly, state law might mandate that ownership be divided equally among your spouse and children. While they could already be part of your succession plan, this may not align with your intentions, especially if you plan to transfer ownership to a business partner or key employee.
Planning ahead empowers you to control what happens to your business, whether you step away by choice or due to unforeseen circumstances. Without a plan, you may lose control over the future of your enterprise.
Business Risks and Estate Planning
While taking risks might have been key to building your business, creating an estate plan requires a more structured, by-the-book approach. Failing to safeguard your business with a comprehensive estate plan is a risk no entrepreneur can afford to take.
A solid estate plan includes clear operational guidelines and the necessary legal documents to ensure business continuity. While your unique skills and vision have shaped the company, a business overly dependent on your personality may struggle to survive in the long term. Handling successor personalities and managing expectations is vital in business estate planning. For family-owned businesses, internal conflicts and placing relatives in unsuitable roles can put the company’s future at risk.
According to Edward Jones, roughly half of business successors are family members. While it may be tempting to give a loved one a chance when planning for succession, personal ties shouldn’t compromise business success. It’s crucial that your chosen successor—whether family or not—is actively involved in the business before taking over.
Effective communication is essential to a smooth succession plan, just as it is to running a successful business. To prevent surprises and align everyone toward a common goal, openly discuss your plans with family members and other key stakeholders. Explain your decision-making process, welcome their input, and work together to ensure a smooth transition.
Protecting Your Business with Estate Planning Documents
Start with the essentials when crafting your estate plan: create a will, establish a durable power of attorney, and set up a healthcare directive. For added protection, consider placing your business in a trust as part of your estate planning strategy.
Choosing the right person for power of attorney is critical. This individual will have the legal authority to manage your business if you’re incapacitated. They should understand not only how to run the business in your absence but also how your personal and business finances are interconnected. For instance, if your business is an LLC, mixing personal and business expenses could expose you to legal risks.
A family member already involved in the business might be a suitable choice for power of attorney. However, a trusted professional with deep financial knowledge may be better equipped to make informed, impartial decisions.
Incorporating a buy-sell agreement into your business estate plan is also crucial. These agreements typically activate upon the owner’s death, incapacitation, or other significant events. A buy-sell agreement defines how the business will be valued, what events will trigger the buyout, and how the buyout will be funded.
Additional Key Factors to Consider
Working with Financial Advisors and Estate Planning Attorneys
Incorporating a financial advisor into your business planning is essential for entrepreneurs, alongside consulting an estate planning attorney. According to the Edward Jones succession survey, only 37% of business owners leverage a financial advisor as a resource for business succession planning.
Integrating financial and legal strategies can be more effective in creating a comprehensive succession plan. Even if a business owner has a well-defined succession strategy in place, a financial advisor assists with the critical details necessary for successful implementation.
The Importance of Tax Planning for Entrepreneurs
Tax law and strategies for maximizing tax efficiencies play a crucial role in estate planning, especially when an estate includes business interests and assets.
Incorporating charitable contributions or establishing a charitable entity can help lower estate taxes while benefiting your heirs. Philanthropy also offers a meaningful way to extend your legacy to the broader community.
Each year, numerous tax-related legislative proposals are considered, making it challenging to predict which laws will be enacted and their potential impact on personal and business assets. The possibility of new tax legislation, especially with changes expected under the next presidential administration and Congress in 2025, is a key reason to revisit and update your estate plan.
Life and Disability Insurance
Leverage life and disability insurance to benefit your business strategically. Life insurance can serve as a vital income source for your family or designated beneficiaries after your passing. It can also ensure a steady income stream for your business, enabling it to operate smoothly in your absence. Additionally, life insurance can be utilized to fund buy-sell agreements.
Disability insurance is essential for protecting against both short- and long-term disabilities. It’s advisable to maintain separate policies for personal and business beneficiaries. For your business policy, designate a key partner or employee as the beneficiary to ensure continuity and support during challenging times.
Maximize Your Business Value Through Estate Planning
Estate planning attorneys work with tax and financial advisors to help business owners plan for an expected ownership transition as well as unexpected events like business breakups and bankruptcy. Keeping your estate plan up to date is no less important than creating an initial plan. Business plans need to be adjusted from time to time as things change, and so do business succession and estate plans. Contact us today to ensure your business is optimized for estate planning success!
Bromlow Law, PLLC and Laura L. Bromlow, are dedicated to the practice of Elder Law and Estate Planning. Our practice focuses solely on working with clients in these and closely related legal fields. Laura L. Bromlow is a Certified Elder Law Attorney with the National Elder Law Foundation. Bromlow Law, PLLC strives to enhance communication among family members and loved ones and to keep them all out of conflict so they can stay out of court. We want to help you keep your close circle safe!
Please contact our office today at (281) 665-3807 to schedule a free consultation to discuss your legal matters. We look forward to the opportunity to work with you.