Business Owners & Estate Plans – The Playbook

As a succession planner, people often ask me the question “what is a succession plan?” A succession plan is a strategy created by a business owner that addresses how to use the owner’s income and assets to maximize the owner’s happiness. Because most business owners’ largest source of income is derived from the business and the owner’s largest asset is the business, a key consideration of a plan is when and how leadership and ownership of the business should transition. But sometimes, like the best laid plans of mice and men, the plan goes astray. In those times, it is critical to have a business continuity plan, or what I refer to as the “playbook.”

For business owners, estate plans should include all of the necessary estate planning documents: wills, trusts, financial and health care powers. But unlike others whose estate plans are often complete with these documents, business owners need one additional document. The playbook.

Step 1: Getting Started

The playbook answers the following questions:

• If the business owner can no longer run and/or own the business, how does the owner want to use the business value to maximize the happiness of the people the owner cares about?
  • Should those people continue to own the business or should they sell the business?
  • If they should continue to own the business:
    • What decisions does the business owner uniquely make?
    • Who should make those decisions when the business owner cannot?
    • Will the business owner ever be able to make those decisions again (temporary incapacity vs. permanent incapacity vs. death)?
  • If they should sell the business:
    • What team should be employed to assist the family in selling the business?
    • What information does the owner uniquely have that the team is going to need?
    • How is that information documented and communicated to the team while the owner still is able to do so?
    • How do they ensure that buyers do not exercise leverage in paying “fire sale” prices due to the death or incapacity of the owner?

Step 2: Finalize Your Playbook and Plan an Annual Funeral

Next comes the playbook itself, which lays out:

• What happens to the ownership of the business under what circumstances and why
• What decisions the owner uniquely makes, how the owner makes them (what is the information gathered and the decision process used)
• Who the business owner trusts to make those decisions and why
• How the business is to be used to take care of the people the owner cares about
• The team to be employed to execute the plan

A key piece of the planning is the “annual funeral.” The business owner is “killed off” once per year and the team and the family go through the plan steps together. Those annual “practice” sessions highlight gaps in the plan that can be corrected.

Step 3: Review Your Legal Documents

Finally, review any legal documents that may need to be amended to empower the execution of the playbook, including altering decision making authority to insure the right people are making the right decisions with the right information at the right time.

For example, usually owners think that their decision-making authority emanates from their ownership of company equity. But actually, under the law, the equity gives them the power to choose a board which has the power to choose executives who run the day to day operations of the company. Therefore, it is necessary to empower subsequent decision makers under the right corporate documents, which could include bylaws or shareholder agreements.

Further, if the owner has become incapacitated, it is important that financial powers of attorney are consistent with these corporate documents. Finally, if the owner passes away, equity ownership that passes under wills and trusts should provide ownership and decision making rights consistent with the playbook and the corporate governance documents.

So, business owners, does your estate plan have a playbook?

Does the playbook answer the questions highlighted in this article? If not, it might be time to let the Johnson Financial Group Private Client Services Team help you put together a plan to care for the people you care about. Contact Joe Maier or Bob Schneider if you’d like to start a conversation.