It has been said that seventy percent (70%) of Americans have done no estate planning. I would suspect this number may be even higher among business owners when it comes to creating an exit or succession plan for their business.
If you are a small business owner, then you know planning for your finances and your estate is not that simple. In fact, you and your business need to plan together, and that means succession or exit planning.
For added incentive and another horror story on the subject, take a look at a recent article on the Wealth Counsel blog. It’s the story of three businessmen that proves both the necessity for planning and the necessity of understanding the plan.
These three businessmen were at the head of a once-prosperous construction company and even had the proper forethought to set out an agreement ahead of time. Of course, the economic meltdown hit the construction market fairly hard and that company turned south fast. As a result, the three put their own funds into the company by way of personal loans just to keep it afloat.
One of the partners then contracted and succumbed to a terminal disease. In turn, this prompted the question of how his life-insurance funds ought to be distributed and the role of his stake in the company. Naturally, the surviving spouse thought she was to be compensated for her husband’s interest in the company. On the other side of the table, however, the surviving partners thought the business was owed some of the life insurance money (to help pay off their personal loans to the company).
It was, essentially, a mess.
Thankfully, on the basis of the existing plan – even if it wasn’t as comprehensive as it ought to have been – the parties were able to come to a compromise.
Teaching point? It goes to show that even a little planning is better than no planning. Otherwise, the case may have become fodder for protracted litigation and huge legal fees. Still, it is essential that all parties understand the plan and work to effect it in the intended spirit.
Reference: Wealth Counsel (December 28, 2011) “Creating an Exit or Succession Plan for Your Business”