Read the full article at: time.com
If you’re a small business owner, you’re probably too busy focusing on the here and now to consider what will happen if you should unexpectedly pass away or become ill and are forced to retire early. Your business is most likely the largest component of your net worth and if you don’t have some sort of exit plan in place, you could easily jeopardize the business you’ve worked so hard to build.
To prepare for your future, first meet with an estate attorney and work out some sort of an estate plan. Your estate plan should include six key components:
1. A will that specifies how your assets should be transferred, and to whom they should be transferred after you die. Include a provision giving your executor access to a list of all your bank accounts, email accounts, file sharing, social networks, and their passwords. Keep this information in a secure place that can be easily accessed when needed.
2. A trust that allows you to control what happens to your assets after you die. A trust is similar to a will, but any items which are placed under the ownership of the trust can bypass the probate process. Assets placed under the trust can transfer to heirs much more quickly and can dramatically reduce legal fees and estate taxes.
3. A power of attorney, or durable general power of attorney document, which allows you to name an individual to carry out your business affairs should you become ill or incapacitated. If you don’t have this in place ahead of time, then the court can appoint a guardian to handle your affairs.
4. A buy-sell agreement, which is a contract that establishes an agreed upon plan for the business’s future should you die or become incapacitated. A buy-sell agreement defines a sale price for the business and states whether or not you want your partners to buy out your share, as well as other terms of the sale. In order to define a sale price, you must make an accurate assessment of the value of your business. This is a detailed process which involves reviewing your business’s financials, earnings multiples, tangible and intangible assets, as well as current market value. It’s best to seek assistance from your CPA and attorney before completing your buy-sell agreement and defining the sale price of your business.
5. Life insurance is necessary in order to buy out a deceased partner’s share under a buy-sell agreement. Each living partner should purchase a life insurance policy and name the other partners as beneficiaries or set up a irrevocable life insurance trust to avoid having the insurance proceeds taxed as part of the estate. This way, any surviving owners will receive tax-free capital to purchase the other owners portion of the business from the estate. If you’re a sole proprietor, then you should buy a separate term life insurance policy that names your spouse and children as beneficiaries.
6. A succession plan that outlines what should happen to the business when you die, which includes delegating a successor. You might also mention your wishes for the business’s future. Remember to include a detailed list of what the business owns, including passwords and accounts, as well as what it owes to creditors. A succession plan should be detailed and well thought out. As you gather your financials and other important documents for developing your will, trust and buy-sell agreement, you can also use this information to formulate your succession plan. Again, It’s best to seek assistance from your CPA and attorney while developing your succession plan.
Planning ahead and protecting the future of your business is something every business owner needs to consider. Expecting the unexpected will go a long way when you or your family is faced with circumstances that change the future of the business you’ve worked so hard to build.
“… your business likely accounts for the largest component of your net worth, and it’s easy to see why you should take some time to work on the future of your business.”