By Ken Bloom
November 5, 2009
As a business owner, most of your time is spent managing the business and the employees, especially in today’s tough economic times. Unfortunately, too many business owners don’t give enough thought to what will happen to their business if they die, and how the business can be passed on to their spouse, children or family in the most tax efficient and least costly manner.
If you are fortunate enough to have your spouse, children or other family members actively involved in your business, the transition upon your death will be much simpler. However, many business owners don’t have family members who are involved in their business, or even know anything about how the business is run, which results in confusion and difficulty for the family when the owner dies.
An estate plan is an essential first step, but it’s only a part of the process. Estate plans, no matter how comprehensive, rarely provide instructions on how to run the business following death. For example, one of my clients died in a car accident and he had never communicated with his family or left any documentation regarding several businesses he owned, leaving his family in a bind. So even though the responsibility of running the businesses was passed on to his wife pursuant to his estate plan, she now needs to grapple with how to run these business effectively, how to retain key employees and business advisors, and how to communicate with customers to ensure them that the businesses will continue to run as before.
As tough as it is for someone to deal with the death of a spouse, having to deal with running a business without the intimate knowledge that only comes from being actively involved in the business just adds to the stress.
Whether your family is involved in running your business, or whether they have no interest in it at all, you need to prepare for the inevitability that they will have to run your business at some point. Some things to consider include:
Protecting Key Business Assets
Whether it is tangible assets like your key employees, or intangible assets such as your customer list, it is important for a business to protect the things that make it unique and successful. By protecting these key assets, you also protect the value of your business.
It’s especially important to retain key employees if your family retains ownership of the business, but doesn’t plan to be actively involved in running it. You can do that by locking certain employees into employment contracts, or offering them an equity interest in the business.
Key information about your business, its customers and systems is also an important asset that could damage your business if it gets into your competition’s hands. To protect it, have all of your employees sign confidentiality and non-disclosure agreements. These agreements must be tailored to your specific situation, but are intended to prevent your most valuable information (customer list, for example) from being disclosed to others, such as competitors. By doing that, you can limit the damage that will be done in the event your valuable information gets into the hands of your competitors, or when an employee leaves to start his or her own business and contacts all of your customers to help build their new business venture.
Depending on the business, it may also make sense to have employees sign a non-compete agreement that prohibits them from competing with your business and contacting your customers for a specific time period, such as one or two years. This agreement may also preclude the employee from opening a store or practice within a certain geographic area, a clause that many doctors, dentists or retail businesses use in their non-compete agreements.
Dealing with a Business Partner
If you have a partner in your business who is not a family member, you have to make sure that both your partner and your family are in agreement with how the business will be run upon your death. It is not uncommon for there to be tension between your partner and members of the family regarding how to run the business after you die. Or if you own a professional business, such as a dental practice, your family members may not have the professional licensures needed to own the business. In these instances, you may need a buy-sell agreement to sell your portion of the business to your partner and give the proceeds to your spouse. But remember that your business has provided your family with a certain level of annual income, and you will need to factor that into the sale proceeds so that it can continue to fund your family’s lifestyle in the future after your death.
You have worked hard to build your business into an asset that can be passed onto your family. Make sure that your family is able to take advantage of those assets by developing an effective estate plan and communicating with your family about your business to make the transition upon your death a smooth one.
Ken Bloom is an attorney, financial advisor and tax expert and a partner with Rick Bloom in Bloom Asset Management and in the law firm of Bloom, Bloom & Associates, specializing in business, taxation and estate planning. He has been a featured speaker on investing, estate planning and taxes.