Estate Planning for the Business Owner

Estate Planning for the Business Owner

“Small businesses,” that is, those that have less than 500 employees, comprise 99.9 percent of all businesses in the United States. The owners of these businesses will, someday, exit their businesses due to retirement, incapacity or death. But most are so busy working that they don’t slow down and think about business succession and estate planning issues. That is one of the primary reasons that less than one-third of family businesses survive to the second generation; 65% of those fail to survive the second generation; and 90% of family businesses fail to survive the founder’s grandchildren.


As an owner of a small business you may have multiple advisors, but rarely are the advisors consulted as a team with coordinated input. The team approach, however, is what produces the best results.




Too often, you as a business owner are so busy “working in the business” that you neglect “working on the business.” As a business owner, you may wonder if you can ever retire, and who could possibly take over the business, if you can get retirement income without going out of business, and what would happen to your business (and family) should you prematurely die or become incapacitated. Most do not seriously think about these things until they are ready to retire. That’s when they realize they could have achieved better results if they had only done more to build their business and prepare for its succession.


An advisory team can help you change your focus from how much money you are making today to the future rewards you can be building for your family and retirement.


Two Concepts to Start the Process

Two tools that are often not used by business owners can be most helpful:

  •  The Year-End Review:  This lets the business owner see how the business has performed over the last 10-11 months, review business profitability, and see the tax situation for the year. Often a lead-in to a year-end review is considering ways to reduce taxes in the coming year. It also provides an opportunity to discuss future risk mitigation.
  • The Legal Audit: This is a review of all legal documents of the business, including organizational documents, employment agreements, leases, loan documents and guarantees, and buy/sell agreements. It provides another opportunity to look for tax savings and a way to identify potential gaps or liabilities.

Providing the data for these two reports and reviewing them with the advisory team will help force you to back up and examine business growth and profitability and talk about continuity issues.


How the Team Approach Can Help

No one professional has all the answers, and diverse skills and talents are necessary for the best results. The team approach also minimizes time and costs. Members of the advisory team may include the accountant/CPA, financial planner, insurance advisor(s) (property, casualty, umbrella and life), investment advisor, business attorney, estate planning attorney, valuation specialist and a business broker if an imminent sale of the business is part of the strategy.


  • Planning Tip: All members of the advisory team should be involved so the planning can be coordinated.
  • Planning Tip: Advisory team members should consider keeping their fees for the initial consultation low, or even free, as there likely will be additional paid work for them as the planning progresses.

Step One: Identify Goals

As Dr. Laurence J. Peter, the man who established the famous “Peter Principle” said, “If you don’t know where you’re going, you will probably end up somewhere else.” In order for the business owner client to avoid ending up “somewhere else,” he must establish goals for himself and his business.


Typical business owner goals include the following:

  • Create and preserve the value of the business
  • Exchange that value for money with the least amount in taxes
  • Meet personal and family needs by providing security and continuity of the business in case of the owner’s premature departure
  • Leave a legacy
  • Give money to charity
  • Shift wealth to children
  • Reward key employees
  • Receive full value for the business
  • Keep the business (or sell it) at his exit
  • Take the business to the next level

Step Two: Value the Business

Most owners have no idea what their business is worth, but the value will be needed for a third party buyer if a sale is anticipated. In the meantime, knowing what the business is worth will help in projecting cash flow, estate and gift tax planning, knowing how much insurance to purchase for buy/sell agreements, compensation planning, knowing available collateral for financing, and retirement planning. It also allows the advisory team and the owner to monitor progress toward the owner’s stated objectives.


Step Three: Plan for Business Continuity

The business owner’s overall planning objective for what will happen when he retires, becomes incapacitated, dies or sells the business most often includes that the business will continue despite such an event. Most commonly, the business owner will want the business to survive with whoever he chooses receiving the value of his ownership interest. Likewise, if one owner “departs,” for whatever reasons, the remaining owner(s) usually will want to retain ownership and control and not to be in business with the departed owner’s creditors, surviving spouse and/or heirs.


Step Four: Plan for Personal Wealth Preservation and Succession (Estate Planning) and Asset Protection

Universal client objectives are to preserve wealth and minimize taxes using both lifetime and death planning tools. Where a family business is involved, this requires integrating lifetime succession and business objectives with the estate plan. Estate planning thus becomes part of business planning.



Step Five: Grow and Protect Business Value

From the owner’s perspective, growing the business and protecting its value will maximize the amount realized on the sale of the business, protect assets from potential business and personal creditors, create the ability to sell the business, and can motivate and keep key employees and family members in the business.


Promoting its value will include increasing cash flow; developing operating systems (so that the system, not the owner, who will eventually be gone, becomes the solution); documenting sustainability of earnings (if the owner is taking all the cash out of the business, it will be harder to sell); improving company performance as measured by industry metrics; and paying down debt.


To grow the business and protect its value, it may be necessary to restructure the organization, solidify and diversify the customer base, implement strategies to grow the company, develop and protect proprietary technology, build a solid management team, and groom a successor.


It may also be worthwhile to examine and possibly change the corporate structure (S and C corporations, LLCs and partnerships). The advisory team can help the owner consider tax pros and cons, ease of operation and asset protection features of current and potential entities.


  • Planning Tip: Most business owners don’t think about asset protection until a claim arises. But the best time to plan, of course, is before the protection is needed. Consider discussing asset protection for both business and personal assets early in the planning process.
  • Planning Tip: An umbrella policy is often overlooked by business owners and is an inexpensive start toward the need for asset protection of both business and personal assets.

Step Six: Ownership Transfer

The ability to sell and the value of the business are both affected by intrinsic factors (e.g., how the business has grown); extrinsic factors (e.g., the local and general state of the economy); and the effectiveness of the sale process.


There are only two basic types of ownership transfers – to those who are in the business and to outsiders. Each has special characteristics.


Planning Tip: It can often take seven to ten years of proactive planning to successfully prepare a business for a sale to an outside party.




Depending on the health of the business and your objectives, it can take several years of planning and action to implement a business succession plan and get the other planning in place. A forward thinking advisory team that initiates the planning process years before an anticipated succession event, monitors the progress, and helps keep the owner on track will provide a great service to the business owner, his family and his business.


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