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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. Your article is a good intro the recent amendments to Fed.R.Civ.P. For a much longer - though not necessarily better -- summary, counsel might want to read THE CHIEF UMPIRE IS CHANGING THE STRIKE ZONE, which I co-authored and which was just published in the January issue of THE VERDICT (the monthly publication of the Indiana Trial Lawyers Association).

  2. Thank you, John Smith, for pointing out a needed correction. The article has been revised.

  3. The "National institute for Justice" is an agency for the Dept of Justice. That is not the law firm you are talking about in this article. The "institute for justice" is a public interest law firm. http://ij.org/ thanks for interesting article however

  4. I would like to try to find a lawyer as soon possible I've had my money stolen off of my bank card driver pressed charges and I try to get the information they need it and a Social Security board is just give me a hold up a run around for no reason and now it think it might be too late cuz its been over a year I believe and I can't get the right information they need because they keep giving me the runaroundwhat should I do about that

  5. It is wonderful that Indiana DOC is making some truly admirable and positive changes. People with serious mental illness, intellectual disability or developmental disability will benefit from these changes. It will be much better if people can get some help and resources that promote their health and growth than if they suffer alone. If people experience positive growth or healing of their health issues, they may be less likely to do the things that caused them to come to prison in the first place. This will be of benefit for everyone. I am also so happy that Indiana DOC added correctional personnel and mental health staffing. These are tough issues to work with. There should be adequate staffing in prisons so correctional officers and other staff are able to do the kind of work they really want to do-helping people grow and change-rather than just trying to manage chaos. Correctional officers and other staff deserve this. It would be great to see increased mental health services and services for people with intellectual or developmental disabilities in the community so that fewer people will have to receive help and support in prisons. Community services would like be less expensive, inherently less demeaning and just a whole lot better for everyone.

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