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Column: Does your client's business have a will?

November 9, 2011
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maurer-greg-mug.jpgBy Greg Maurer

With the recent death of Apple founder Steve Jobs, there has been a lot of discussion about the future of the company. In this case, the timing of Jobs’ diagnosis gave the company ample time to prepare a succession plan. Many transitions happen much more suddenly, and the ultimate result of such a transition in the future depends on whether the business owner asks this question today: “What happens to my business if I die tomorrow?”

According to Trusts and Estates Magazine, approximately 90 percent of U.S. businesses are family firms. That’s more than 17 million businesses. These businesses represent 64 percent of our gross domestic product and employ 62 percent of the U.S. workforce. Family businesses have challenges as they move from one generation to the next, from family to institutional ownership or when partners retire or pass on. It is vital to our economy that these transitions happen smoothly, with as little decline in enterprise value as possible. But are today’s business owners planning for succession?

In April, U.S. Trust issued the report “2011 U.S. Trust Insights on Wealth and Worth,” which found that 91 percent of the people surveyed said they have a will, but only three percent of business owners in this group have a business succession plan. When a business owner who is also a day-to-day manager dies, there is both a management and an ownership transition. Each transition creates considerable risk to the long-term value of a business. When occurring simultaneously, the risk increases substantially.

Counsel to business owners who understand what may happen when owners die without a clear succession plan should challenge the owner to answer the question: “What happens to my business if I die tomorrow?” Squabbling children often spend too much time arguing over money and control and not enough time managing the business. Spouses without the requisite business knowledge or experience attempt to manage the business and often fail. Key employees may start looking for more stable ground. Customers may get nervous about the performance of the company. All of these factors may contribute to lower revenues and margins, causing enterprise value to fall. If a sale occurs under a situation of duress rather than strength, the value of the business that the now-deceased owner worked so tirelessly to build will suffer.

The unfortunate circumstances that can occur without a succession plan are likely not new to business and estate planning attorneys. Learning from these experiences should push counsel to proactively advise clients of the dire need for both a management and ownership succession plan.

It is important to identify risks in a transition situation. If the client is an owner-operator, the concerns include not only who will make the decisions reserved for ownership, but also who will make the gritty day-to-day management decisions that preserve and hopefully add value to the enterprise. This process involves discussion with senior management about how decisions will be made. For example, will there be an interim CEO? An executive committee of the board? Both? Once these issues are decided, assurances should be provided to the company’s key stakeholders.

In addition to the management transition plan, a plan to ensure a functioning ownership group is crucial. Careful consideration needs to be given to whether the heirs will be able to function together and make the critical decisions necessary to avoid value degradation. Self-awareness and brutal honesty are critical here.

In both the owner and owner-operator scenarios, it is prudent to consider how much of the intrinsic value of the enterprise is dependent upon a key individual (this is especially true for small law firms). In such cases, key-man insurance is often a convenient and relatively inexpensive way to mitigate this risk. If the client has a business partner, the corporate attorney should ask the partners to consider with whom they would be making decisions if the other partner dies. If working with the partner’s heirs is not palatable (and it rarely is), then a buy-sell agreement coupled with a life insurance policy might be in order.

The overall key to an effective succession plan is communication, and counsel can play a key role as facilitator. If your client can’t answer the question “What happens to my business if I die tomorrow?”, then you have a phone call to make. •
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Greg Maurer is managing director of Heron Capital, an investment firm that oversees Heron Capital Equity Partners, a private equity partnership, and Heron Capital Venture Fund, a health care venture capital fund. In a prior life, he was an attorney at Schiff Hardin in Chicago, Ill. He can be reached at greg@heroncap.com. The opinions expressed in this column are those of the author.

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  1. From back in the day before secularism got a stranglehold on Hoosier jurists comes this great excerpt via Indiana federal court judge Allan Sharp, dedicated to those many Indiana government attorneys (with whom I have dealt) who count the law as a mere tool, an optional tool that is not to be used when political correctness compels a more acceptable result than merely following the path that the law directs: ALLEN SHARP, District Judge. I. In a scene following a visit by Henry VIII to the home of Sir Thomas More, playwriter Robert Bolt puts the following words into the mouths of his characters: Margaret: Father, that man's bad. MORE: There is no law against that. ROPER: There is! God's law! MORE: Then God can arrest him. ROPER: Sophistication upon sophistication! MORE: No, sheer simplicity. The law, Roper, the law. I know what's legal not what's right. And I'll stick to what's legal. ROPER: Then you set man's law above God's! MORE: No, far below; but let me draw your attention to a fact I'm not God. The currents and eddies of right and wrong, which you find such plain sailing, I can't navigate. I'm no voyager. But in the thickets of law, oh, there I'm a forester. I doubt if there's a man alive who could follow me there, thank God... ALICE: (Exasperated, pointing after Rich) While you talk, he's gone! MORE: And go he should, if he was the Devil himself, until he broke the law! ROPER: So now you'd give the Devil benefit of law! MORE: Yes. What would you do? Cut a great road through the law to get after the Devil? ROPER: I'd cut down every law in England to do that! MORE: (Roused and excited) Oh? (Advances on Roper) And when the last law was down, and the Devil turned round on you where would you hide, Roper, the laws being flat? (He leaves *1257 him) This country's planted thick with laws from coast to coast man's laws, not God's and if you cut them down and you're just the man to do it d'you really think you would stand upright in the winds that would blow then? (Quietly) Yes, I'd give the Devil benefit of law, for my own safety's sake. ROPER: I have long suspected this; this is the golden calf; the law's your god. MORE: (Wearily) Oh, Roper, you're a fool, God's my god... (Rather bitterly) But I find him rather too (Very bitterly) subtle... I don't know where he is nor what he wants. ROPER: My God wants service, to the end and unremitting; nothing else! MORE: (Dryly) Are you sure that's God! He sounds like Moloch. But indeed it may be God And whoever hunts for me, Roper, God or Devil, will find me hiding in the thickets of the law! And I'll hide my daughter with me! Not hoist her up the mainmast of your seagoing principles! They put about too nimbly! (Exit More. They all look after him). Pgs. 65-67, A MAN FOR ALL SEASONS A Play in Two Acts, Robert Bolt, Random House, New York, 1960. Linley E. Pearson, Atty. Gen. of Indiana, Indianapolis, for defendants. Childs v. Duckworth, 509 F. Supp. 1254, 1256 (N.D. Ind. 1981) aff'd, 705 F.2d 915 (7th Cir. 1983)

  2. "Meanwhile small- and mid-size firms are getting squeezed and likely will not survive unless they become a boutique firm." I've been a business attorney in small, and now mid-size firm for over 30 years, and for over 30 years legal consultants have been preaching this exact same mantra of impending doom for small and mid-sized firms -- verbatim. This claim apparently helps them gin up merger opportunities from smaller firms who become convinced that they need to become larger overnight. The claim that large corporations are interested in cost-saving and efficiency has likewise been preached for decades, and is likewise bunk. If large corporations had any real interest in saving money they wouldn't use large law firms whose rates are substantially higher than those of high-quality mid-sized firms.

  3. The family is the foundation of all human government. That is the Grand Design. Modern governments throw off this Design and make bureaucratic war against the family, as does Hollywood and cultural elitists such as third wave feminists. Since WWII we have been on a ship of fools that way, with both the elite and government and their social engineering hacks relentlessly attacking the very foundation of social order. And their success? See it in the streets of Fergusson, on the food stamp doles (mostly broken families)and in the above article. Reject the Grand Design for true social function, enter the Glorious State to manage social dysfunction. Our Brave New World will be a prison camp, and we will welcome it as the only way to manage given the anarchy without it.

  4. When I hear 'Juvenile Lawyer' I think of an attorney helping a high school aged kid through the court system for a poor decision; like smashing mailboxes. Thank you for opening up my eyes to the bigger picture of the need for juvenile attorneys. It made me sad, but also fascinated, when it was explained, in the sixth paragraph, that parents making poor decisions (such as drug abuse) can cause situations where children need legal representation and aid from a lawyer.

  5. Some in the Hoosier legal elite consider this prayer recommended by the AG seditious, not to mention the Saint who pledged loyalty to God over King and went to the axe for so doing: "Thomas More, counselor of law and statesman of integrity, merry martyr and most human of saints: Pray that, for the glory of God and in the pursuit of His justice, I may be trustworthy with confidences, keen in study, accurate in analysis, correct in conclusion, able in argument, loyal to clients, honest with all, courteous to adversaries, ever attentive to conscience. Sit with me at my desk and listen with me to my clients' tales. Read with me in my library and stand always beside me so that today I shall not, to win a point, lose my soul. Pray that my family may find in me what yours found in you: friendship and courage, cheerfulness and charity, diligence in duties, counsel in adversity, patience in pain—their good servant, and God's first. Amen."

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