As a business owner, you have worked hard to build your enterprise and create a legacy that can benefit your family and community for years to come. However, it’s important to remember that your hard work could be at risk if you don’t take the necessary steps to protect your estate and plan for the future. Estate planning is particularly important for business owners, as it involves considerations beyond those of a traditional estate plan.

Business owners may have multiple business interests, partners, and employees to consider when creating estate and succession plans. Without proper planning, a business owner’s death or incapacity could have a significant impact on the operation and value of their business, as well as the financial well-being of their family and heirs.

Succession Planning

Succession planning is the process of identifying and developing a plan for the transfer of ownership and management of a business. This step is necessary even if you have a solid estate plan in place. It’s crucial for business owners to think about who will take over the business when they retire, or in the unfortunate event, become disabled or pass away. If you don’t have a plan in place, your business could suffer without your guidance and leadership.

One option is to mentor and train a family member or other trusted employee to take over the business. This requires careful consideration of their abilities and willingness to take on the role. It’s essential to begin this process early, as it can take years to prepare someone to take over a complex company.

In addition to succession planning for the ownership and management of the business, business owners should also consider succession planning for key employees and leadership positions. This planning can help ensure that the company continues to operate smoothly even if the owner or other essential employees are no longer able to work.

Another option is to sell the business to a third party. This route requires a valuation of the business and finding the right buyer who shares your vision and values for the company.

Your advisors should coordinate any business succession planning with your personal estate plan, to ensure they work together and do not conflict or cause uncertainty about your wishes. Business agreements can override a person’s will, which can come as a surprise and lead to unintended consequences. By evaluating your estate plan as a whole, you can take proactive steps to guarantee your personal and professional legacies are preserved.

Buy-Sell Agreements

A buy-sell agreement, sometimes known as a buyout or shareholder agreement, is a legal agreement that outlines what happens to a business in the event of an owner’s death, disability, or retirement. This agreement is typically between the business owners themselves, and it outlines the terms of a sale of the business in the event of one owner’s exit.

Buy-sell agreements can be structured in a few different ways. One option is a cross-purchase agreement, in which the remaining owners agree to buy out the departing owner’s share of the business. Another option is a redemption agreement, in which the business itself agrees to buy out the departing owner’s share.

Why are Buy-Sell Agreements Important?

Buy-sell agreements safeguard the remaining owners and their control over who will own and manage the business after an owner’s exit. This can help prevent disputes among the remaining owners, as the terms of the sale are already agreed upon.

The agreements can be structured in a few different ways, but they are designed to ensure that the organization can continue to operate smoothly in the event of an owner’s departure.

Buy-sell agreements can also help guarantee that the departing owner or their family receives fair value for their share of the business.

Other Considerations for Estate Planning

In addition to succession planning and buy-sell agreements, there are a few other considerations that business owners should keep in mind when it comes to estate planning:

• Valuation: Business owners must determine the fair market value of their business interests, which can be a complex and challenging process. Valuation methods can vary depending on the type of business, but common methods include income-based, asset-based, and market-based approaches. Accurate valuation is crucial in determining the appropriate estate tax liability and in planning for the transfer or sale of the business.
• Tax Planning: Business owners should work with an experienced advisor to develop a plan that minimizes their estate tax liability and appropriately values their assets. Tax planning strategies can include gifting assets to family members or charities, establishing trusts, and taking advantage of tax-deferred retirement accounts.

Estate planning is essential for business owners who want to protect their legacy, their assets, and their families. Succession planning and buy-sell agreements are essential tools for ensuring a smooth transition of ownership and management. By taking the time to create a comprehensive estate plan that includes these items and other important considerations, business owners can have peace of mind knowing that their hard work and legacy will continue to benefit their family and community for years to come.

Have Additional Questions?

If you would like to learn more about specific estate planning considerations for your business, our team is here to help. Please contact us for more information.

Rebecca McNabb, J.D., LL.M., serves as Vice President and Trust Officer for Magnolia Trust Company. In this role, Rebecca brings her legal background and trust administration experience to support the areas of complex estate planning and trust administration issues.