In this episode, we’re continuing a discussion that affects many small business owners, myself included, often overlook: estate planning.
As addressed in a previous episode, we pour our heart and soul into building our dreams. But have you ever stopped to think about what happens to all of that after you’re gone or if you become incapacitated? Who will run the business? Will it continue to thrive? What about your employees and your loyal client base? These are critical questions that need to be addressed before a crisis hits.
Headlines worth looking at:
Reuters: Estate planning considerations for business owners
Kiplinger: Backdoor Roth IRAs: Help Your Kids Keep More of Their Inheritance
Gallup Poll: Most Small-Business Owners Lack a Succession Plan
Barrons: Family-Owned Businesses Face the Future. What Succession Looks Like.
PNC Insights: All You Need To Know About Small Business Succession Planning | PNC Insights
The Boomer Tsunami
This issue is especially critical for my fellow Boomers. A staggering 41% of privately owned businesses in the US are owned by Boomers, representing roughly 12 million businesses and over 25 million workers. Yet, more than 60% of these businesses lack formal exit plans. This represents a $10 trillion contribution to our domestic economy! Over the next 10-15 years, 70% of these businesses will change ownership. What will happen to them, their employees, and the communities they serve?
Estate Planning for Business Owners: Why the Hesitation?
So, why do so many of us avoid this crucial planning?
- Emotional Attachment: Our businesses are our life’s work, a core part of our identity. Letting go is incredibly challenging.
- No Clear Successor: Many owners don’t have family members interested in taking over, and finding the right person can be daunting.
- Financial Unpreparedness: We might fear we haven’t saved enough for retirement outside the business, making us reluctant to sell.
- Enjoyment of Work: Many of us simply love what we do and aren’t ready to retire!
The Power of Early Planning for Business Owners
The key takeaway here is EARLY PLANNING. This means training, mentoring successors, and putting a clear plan in place. Whether it’s through your Last Will and Testament, a trust, or a separate agreement like an operating agreement or buy-sell agreement, having a strategy is paramount.
How Business Owners Can Avoid Estate Planning Pitfalls
By planning, you’re avoiding a multitude of headaches:
- Continuity: You maintain leadership and day-to-day operations.
- Protection: You shield your business assets and family from costly legal battles.
- Clarity: You provide clear instructions for successors, employees, and stakeholders.
- Surprises: You sidestep nasty surprises like probate or unplanned taxes.
Business Estate Planning: Taking the First Steps
Here are some important steps to start thinking about for your exit plan:
- Start Early: Even five years before your desired exit date.
- Get a Professional Valuation: Know what your business is truly worth now and what it could be worth in the future.
- Address Gaps: Look at your Standard Operating Procedures (SOPs) and identify areas for improvement.
- Assemble a Transition Team: Don’t go it alone! Engage the best and brightest, who might even be interested in a buyout.
- Consider Your Transition Type: What’s the best fit for you and your business?
- Understand Tax Consequences: Plan to distribute value in a way that avoids unnecessary taxes.
- Inventory and Access: Document everything you own and owe, including digital assets. Appoint a digital fiduciary.
The Bottom Line
The future and legacy of your business, even its winding down, needs to be part of your estate plan. Nearly 73% of privately held companies in the US are expected to transition ownership in the next decade, yet almost half lack a formal business plan. Don’t be one of them!
The coming decade offers incredible opportunities for both current owners and those looking to acquire established businesses. Thoughtful transitions can preserve local economic anchors and bring fresh energy. Let’s make sure we’re prepared to navigate this exciting, yet challenging, period.
If you’re a small business owner and haven’t addressed what happens to your business after you, now is the time. Your future, and the future of your business, depends on it.
🔑 For help, visit https://www.NancyCogar.com
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Disclaimer: The information provided on this website and on the podcast is not intended to be considered as legal advice or constitute an attorney/client relationship as provided under the Tennessee Rules of Professional Conduct.
