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
ADVERTISEMENT
Subscribe to Indiana Lawyer
  1. OK, take notice. Those wondering just how corrupt the Indiana system is can see the picture in this post. Attorney Donald James did not criticize any judges, he merely, it would seem, caused some clients to file against him and then ignored his own defense. James thus disrespected the system via ignoring all and was also ordered to reimburse the commission $525.88 for the costs of prosecuting the first case against him. Yes, nearly $526 for all the costs, the state having proved it all. Ouch, right? Now consider whistleblower and constitutionalist and citizen journalist Paul Ogden who criticized a judge, defended himself in such a professional fashion as to have half the case against him thrown out by the ISC and was then handed a career ending $10,000 bill as "half the costs" of the state crucifying him. http://www.theindianalawyer.com/ogden-quitting-law-citing-high-disciplinary-fine/PARAMS/article/35323 THE TAKEAWAY MESSAGE for any who have ears to hear ... resist Star Chamber and pay with your career ... welcome to the Indiana system of (cough) justice.

  2. GMA Ranger, I, too, was warned against posting on how the Ind govt was attempting to destroy me professionally, and visit great costs and even destitution upon my family through their processing. No doubt the discussion in Indy today is likely how to ban me from this site (I expect I soon will be), just as they have banned me from emailing them at the BLE and Office of Bar Admission and ADA coordinator -- or, if that fails, whether they can file a complaint against my Kansas or SCOTUS law license for telling just how they operate and offering all of my files over the past decade to any of good will. The elitist insiders running the Hoosier social control mechanisms realize that knowledge and a unified response will be the end of their unjust reign. They fear exposure and accountability. I was banned for life from the Indiana bar for questioning government processing, that is, for being a whistleblower. Hoosier whistleblowers suffer much. I have no doubt, Gma Ranger, of what you report. They fear us, but realize as long as they keep us in fear of them, they can control us. Kinda like the kids' show Ants. Tyrannical governments the world over are being shaken by empowered citizens. Hoosiers dealing with The Capitol are often dealing with tyranny. Time to rise up: https://www.theguardian.com/technology/2017/jan/17/governments-struggling-to-retain-trust-of-citizens-global-survey-finds Back to the Founders! MAGA!

  3. Science is showing us the root of addiction is the lack of connection (with people). Criminalizing people who are lonely is a gross misinterpretation of what data is revealing and the approach we must take to combat mental health. Harsher crimes from drug dealers? where there is a demand there is a market, so make it legal and encourage these citizens to be functioning members of a society with competitive market opportunities. Legalize are "drugs" and quit wasting tax payer dollars on frivolous incarceration. The system is destroying lives and doing it in the name of privatized profits. To demonize loneliness and destroy lives in the land of opportunity is not freedom.

  4. Good luck, but as I have documented in three Hail Mary's to the SCOTUS, two applications (2007 & 2013),a civil rights suit and my own kicked-to-the-curb prayer for mandamus. all supported in detailed affidavits with full legal briefing (never considered), the ISC knows that the BLE operates "above the law" (i.e. unconstitutionally) and does not give a damn. In fact, that is how it was designed to control the lawyers. IU Law Prof. Patrick Baude blew the whistle while he was Ind Bar Examiner President back in 1993, even he was shut down. It is a masonic system that blackballs those whom the elite disdain. Here is the basic thrust:https://en.wikipedia.org/wiki/Blackballing When I asked why I was initially denied, the court's foremost jester wrote back that the ten examiners all voted, and I did not gain the needed votes for approval (whatever that is, probably ten) and thus I was not in .. nothing written, no explanation, just go away or appeal ... and if you appeal and disagree with their system .. proof positive you lack character and fitness. It is both arbitrary and capricious by its very design. The Hoosier legal elites are monarchical minded, and rejected me for life for ostensibly failing to sufficiently respect man's law (due to my stated regard for God's law -- which they questioned me on, after remanding me for a psych eval for holding such Higher Law beliefs) while breaking their own rules, breaking federal statutory law, and violating federal and state constitutions and ancient due process standards .. all well documented as they "processed me" over many years.... yes years ... they have few standards that they will not bulldoze to get to the end desired. And the ISC knows this, and they keep it in play. So sad, And the fed courts refuse to do anything, and so the blackballing show goes on ... it is the Indy way. My final experience here: https://www.scribd.com/document/299040062/Brown-ind-Bar-memo-Pet-cert I will open my files to anyone interested in seeing justice dawn over Indy. My cases are an open book, just ask.

  5. Looks like 2017 will be another notable year for these cases. I have a Grandson involved in a CHINS case that should never have been. He and the whole family are being held hostage by CPS and the 'current mood' of the CPS caseworker. If the parents disagree with a decision, they are penalized. I, along with other were posting on Jasper County Online News, but all were quickly warned to remove posts. I totally understand that some children need these services, but in this case, it was mistakes, covered by coorcement of father to sign papers, lies and cover-ups. The most astonishing thing was within 2 weeks of this child being placed with CPS, a private adoption agency was asking questions regarding child's family in the area. I believe a photo that was taken by CPS manager at the very onset during the CHINS co-ocerment and the intent was to make money. I have even been warned not to post or speak to anyone regarding this case. Parents have completed all requirements, met foster parents, get visitation 2 days a week, and still the next court date is all the way out till May 1, which gives them(CPS) plenty of to time make further demands (which I expect) No trust of these 'seasoned' case managers, as I have already learned too much about their dirty little tricks. If they discover that I have posted here, I expect they will not be happy and penalized parents again. Still a Hostage.

ADVERTISEMENT