By David Kronenfeld, Cotney Construction Law
What happens if I get hit by a bus? Will my spouse or child get my business? What happens to my employees? What if my business partner gets a divorce? These are questions my clients ask all too often in the course of business succession planning. As an attorney who has also worked as an investment banker and in a small business, I know well the angst caused by these nagging questions. I also know that too often a plan to address them isn’t put in place until it’s either too late or it’s incredibly expensive to create the plan.
I tell my clients that my goal as a corporate attorney is to walk alongside them at every stage in the life of their company – from forming a company using their back of the napkin idea to drafting and reviewing contracts with their customers to managing day to day governance issues to growing it through acquisitions to the sale, gifting or merging of the company they’ve spent years nurturing. My job is to help business owners anticipate issues before they arise so they can focus on what they do best – building and operating their business. I aim to help protect them from the known issues as well as the unknown unknowns. That’s why a good business succession plan finds its roots in a solid operating or shareholder agreement. Establishing baseline rules for who has voting interests, who can transfer their interests in the company, what happens if a partner dies, etc. all occur in the foundational documents of a company.
In addition to a solid operating or shareholder agreement, some of the common components of business succession planning include buy-sell agreements, gifting, an M&A transaction, employee stock option plans, management buy-outs and key-man life insurance. Buy-sell agreements are especially useful in a multi-partner business to ensure there is an agreed upon formula in the event a partner dies or there is a dispute. If your estate is above the $5.6 million ($11.2 million for couples) estate and gift tax exclusion, then gifting is an incredibly powerful tool. Gifting minority shares in your company lowers the taxable value of your estate by applying minority discounts to the gift. A merger or acquisition transaction with a competitor or company or individual is another method of maximizing the value of your company and retirement as you look to transition away from your business. An employee stock option plan or management buy-out are also excellent methods for monetizing your business outside of its traditional cash flow and often give you time to transition out of the business over the course of several years. Finally, company paid key-man life insurance can be a good tool to ensure that the company can afford to redeem your share of the company upon your death. This provides cash to your heirs while helping you sleep better at night.
Too often I see business owners afflicted by the unknown unknowns – the business owner whose partner gets a divorce and now the ex-wife has a say in the business, the son who takes over management, goes to Vegas and gambles away “his inheritance”, and father needs to step back into the business. This is why a good business succession plan won’t rest on any single document, but rather is a holistic approach to providing “rules of the road” for any of those unknown unknowns whether they crop up in the first month of the business or one month away from the sale of the company you’ve spent much of your adult life building.
Author’s note: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.
David Kronenfeld is an attorney at Cotney Construction Law, who focuses his practice on a broad range of transactional matters. Cotney Construction Law is an advocate for the roofing industry, and serves as General Counsel of TARC, FRSA, WSRCA, RT3, NWIR, and TRI. For more information, contact the author at (866) 303-5868 or go to www.cotneycl.com.