Planning is a must for small business owners.
Market studies show that 65-75% of individuals surveyed have not created estate plans, or their plans are outdated and ineffective. The percentage of unprotected individuals and families is usually higher for younger generations.
Planning is important for everyone, but small business owners (SBOs) have more to lose than the average salaried employee if they neglect planning. Unfortunately, small business owners are often too busy working in their business to take time to plan. The decision to defer planning can be devastating.
4 Key Reasons Small Business Owners Need a Plan
There are four main reasons why SBOs need to have completed and up-to-date planning:
1. Manage Unexpected Mental Capacity
The SBOs themselves are a key part of the success of the business. If the owner becomes mentally incapacitated, the impacts on the business can be crippling.
Imagine a key revenue producer is no longer able to continue in her role, or the key operations director is unable to perform his duties. The General Durable Power of Attorney (PoA) provides a named agent to act for the owner, and this agent can have multiple powers to assist an individual when they can no longer care for themselves. The PoA should have business-specific powers for that agent.
Many “standard” PoAs are not specific enough about which powers are aligned with the small business owner. An SBO needs an advisor who can customize the PoA to alleviate grey areas.
If there is no PoA in place, who will take over to protect the owner’s business interests? Will there be a damaging power struggle within the business? Should the PoA Agent be able to appoint a key employee, or business partner, for continuing the SBOs role in the business? Clear, concise plans should be in place and communicated to the correct people, so in the event of a transition, it can happen quickly and with minimal disruption.
2. Avoid Probate
The marketing slogan “Avoid Probate” commonly touts a big benefit of estate planning trusts. Items within an estate planning trust can help businesses avoid probate and the negative implications of court control over assets.
Generally, when assets end up in the control of the probate court, costs are higher, time delays are longer and privacy is lost (because probate records are public information). The impact of court control can be devastating to businesses. Decision-making is slowed because these decisions often need to be approved by a judge. This loss of agility can affect efficiency and impact market advantage. Additionally, the uncertainty of the business’ future can leave employees feeling insecure. The business could experience a significant talent drain.
It is imperative for the SBO to keep the control of the business in the reliable hands of a business partner, key employee or other empowered individual. This allows continued growth, efficient adaption to market conditions and effective operations. Good estate planning ensures a smooth transition of control for the SBO, helps customers feel confident the business will continue, and helps keep the valuation of the small business high.
3. Smooth Succession
A minority of business owners actually create proactive business succession plans. These business owners invest time in preparing these plans to protect the business and its employees, providing a smooth transition to future business owners. All of these plans are designed to protect the overall value of the business, and pass wealth from the business to loved ones in the next generation. When an SBO has a personal estate plan in place and these estate plans are in sync with the succession plan, all the parts work together. If the small business owner doesn’t take the time to do their own personal planning, the succession plan may not be successful.
Imagine the dilemma of a partner where the surviving spouse of another partner has a valid, legal claim to part of the deceased individual’s business assets. Does this disrupt the overall succession plan of the business? Does this reduce the value of the business to the stakeholders? Does the surviving spouse have any interest in the business, and how can she/he affect the future of the business? Alignment of all partners’ plans prevents problems like these.
4. Proper Business Asset Funding
Imagine the frustration of a surviving spouse when they realize the corporate shares of the family business are not properly aligned with the estate planning trust and will need to go through the probate process. Surprisingly, this can happen very easily when the business owner does not take the time to align their corporate shares, or their LLC Member interests, with their estate planning trusts.
Many times there is a separation between the business assets and the personal estate plans. Advisors, CPAs and attorneys must work to ensure all of these assets are properly aligned.
How Small Business Owners Can Get Started Planning
Small Business Owners definitely present unique challenges with their estate planning. They remain one of the most vulnerable clients if they do not take the time to create their own plan. Often, their businesses are all they really own. This challenge is often compounded as the business owner is too busy with the day-to-day of the business to plan for their future. As such, the unique needs of business owners really demand that they take some time to prioritize planning.
So, how do we get the attention of the typical business owner? Most need to hear the reasons for doing planning multiple times before they decide to take action. They also need to hear how this can affect them personally with their family and loved ones. General examples usually do not motivate, but applying reasons for action to their specific family and business can often help energize the owner to get started.
Our office has found value in identifying “trigger events” that could happen (i.e. the death of a business owner, the divorce of a business owner), and then talking through the results of a “do-nothing” option versus the results of proactive planning. Good business owners will listen to their trusted advisors eventually, and creating a consistent, collective message from the advisor, the attorney and the CPA is often helpful.
If you are an advisor with business owners who need your support in moving forward with planning, give our office a call at 913-345-2323, and we will be happy to review alternatives for your client. We’ve found that investing in a collaborative message on this topic can help move business owners forward in their planning.
If you are a Small Business Owner, and you are ready to create a plan that will protect you, your family, and your business, give us a call at 913-345-2323. We will be happy to get started right away while motivation to do so is strong. We understand, as a Small Business Owner, how many things are vying for your time. We can help you get started in a timely fashion.