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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. Family court judges never fail to surprise me with their irrational thinking. First of all any man who abuses his wife is not fit to be a parent. A man who can't control his anger should not be allowed around his child unsupervised period. Just because he's never been convicted of abusing his child doesn't mean he won't and maybe he hasn't but a man that has such poor judgement and control is not fit to parent without oversight - only a moron would think otherwise. Secondly, why should the mother have to pay? He's the one who made the poor decisions to abuse and he should be the one to pay the price - monetarily and otherwise. Yes it's sad that the little girl may be deprived of her father, but really what kind of father is he - the one that abuses her mother the one that can't even step up and do what's necessary on his own instead the abused mother is to pay for him???? What is this Judge thinking? Another example of how this world rewards bad behavior and punishes those who do right. Way to go Judge - NOT.

  2. Right on. Legalize it. We can take billions away from the drug cartels and help reduce violence in central America and more unwanted illegal immigration all in one fell swoop. cut taxes on the savings from needless incarcerations. On and stop eroding our fourth amendment freedom or whatever's left of it.

  3. "...a switch from crop production to hog production "does not constitute a significant change."??? REALLY?!?! Any judge that cannot see a significant difference between a plant and an animal needs to find another line of work.

  4. Why do so many lawyers get away with lying in court, Jamie Yoak?

  5. Future generations will be amazed that we prosecuted people for possessing a harmless plant. The New York Times came out in favor of legalization in Saturday's edition of the newspaper.

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