ILNews

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

November 9, 2011
Keywords
Back to TopCommentsE-mailPrintBookmark and Share
Indiana Lawyer Columns

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. •
__________

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.

ADVERTISEMENT

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in Indiana Lawyer editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by

facebook - twitter on Facebook & Twitter

Indiana State Bar Association

Indianapolis Bar Association

Evansville Bar Association

Allen County Bar Association

Indiana Lawyer on Facebook

facebook
ADVERTISEMENT
Subscribe to Indiana Lawyer
  1. Bill Satterlee is, indeed, a true jazz aficionado. Part of my legal career was spent as an associate attorney with Hoeppner, Wagner & Evans in Valparaiso. Bill was instrumental (no pun intended) in introducing me to jazz music, thereby fostering my love for this genre. We would, occasionally, travel to Chicago on weekends and sit in on some outstanding jazz sessions at Andy's on Hubbard Street. Had it not been for Bill's love of jazz music, I never would have had the good fortune of hearing it played live at Andy's. And, most likely, I might never have begun listening to it as much as I do. Thanks, Bill.

  2. The child support award is many times what the custodial parent earns, and exceeds the actual costs of providing for the children's needs. My fiance and I have agreed that if we divorce, that the children will be provided for using a shared checking account like this one(http://www.mediate.com/articles/if_they_can_do_parenting_plans.cfm) to avoid the hidden alimony in Indiana's child support guidelines.

  3. Fiat justitia ruat caelum is a Latin legal phrase, meaning "Let justice be done though the heavens fall." The maxim signifies the belief that justice must be realized regardless of consequences.

  4. Indiana up holds this behavior. the state police know they got it made.

  5. Additional Points: -Civility in the profession: Treating others with respect will not only move others to respect you, it will show a shared respect for the legal system we are all sworn to protect. When attorneys engage in unnecessary personal attacks, they lose the respect and favor of judges, jurors, the person being attacked, and others witnessing or reading the communication. It's not always easy to put anger aside, but if you don't, you will lose respect, credibility, cases, clients & jobs or job opportunities. -Read Rule 22 of the Admission & Discipline Rules. Capture that spirit and apply those principles in your daily work. -Strive to represent clients in a manner that communicates the importance you place on the legal matter you're privileged to handle for them. -There are good lawyers of all ages, but no one is perfect. Older lawyers can learn valuable skills from younger lawyers who tend to be more adept with new technologies that can improve work quality and speed. Older lawyers have already tackled more legal issues and worked through more of the problems encountered when representing clients on various types of legal matters. If there's mutual respect and a willingness to learn from each other, it will help make both attorneys better lawyers. -Erosion of the public trust in lawyers wears down public confidence in the rule of law. Always keep your duty to the profession in mind. -You can learn so much by asking questions & actively listening to instructions and advice from more experienced attorneys, regardless of how many years or decades you've each practiced law. Don't miss out on that chance.

ADVERTISEMENT