Protecting the Business Owner

A client's business is often the largest asset in their estate. Yet, despite spending years growing the business and making it successful, some clients think their business has nothing to do with their estate planning. The payoff of all that hard work is a high-value asset that will support the client during their retirement and provide for their loved ones in the event they pass away unexpectedly. Unfortunately, clients often fail to protect that asset because they neglect to plan for future transitions.

Clients work hard to grow a business, yet fail to implement plans to maintain the value of that business in the event of an unexpected death. While a business have significant value while the business owner is alive, if the strength of that business is the owner, it may have little or no value because of his or her sudden death. It is not enough to have a successful business. Owners must develop employees that are willing and able to take over the business. A buy-sell arrangement can solidify the value and longevity of the business by guaranteeing that key employees are buyers for the business in the event the owner decides to retire, becomes incapacitated or dies. In addition to creating a succession plan, Buy Sell Agreements can help protect the value of the business by requiring that the future owners purchase a life insurance policy on the current owner to guarantee purchase funds are available at death.

It is important that a well-drafted Buy Sell Agreement not only be in place, but that clients update that agreement as appropriate. Often terms that seemed reasonable in the initial agreement fail to reflect events and changes that occur as a business grows. Key provisions of a Buy Sell Agreement should include:

• Triggering events when the buyer must purchase the business, such as death, disability, or retirement. 
• An initial value for the business as well as a method for redetermining that value at the time of sale. 
• Payment terms that are fair to the seller, but are not so onerous to the buyer that there is an eventual default

      We are encouraged to have annual check-ups to maintain our health. We are now engaging some of our business clients in a "business health audit" to determine if all of their business documents are up to date and protect their business value. I would encourage all business owners to consider similar steps with their professionals to protect the biggest value in their estate. Later this week we will discuss how clients protect their business from employees who become competitors, using Non-Compete Clauses/Agreements.

Alan Ferrara