A Better Way: Tools for Business Succession Planning

By G. Timothy Leighton *

 

January 15, 2021 —  The previous “Better Way” column explored succession planning as an investment in the future for the enterprise, its owners, employees and even your customers or clients.  In order to preserve the value of the enterprise the business owner has created, it’s important to plan for the orderly transition of ownership.  This article covers some of the tools for that planning.

 

Starting With the End in Mind.  Business owners who ask themselves how they will preserve the value of the business for when they are no longer in business should keep their financial statements current, analyze them regularly both independently and with professional advisors, and arrange legal structures for their present and future positions. By anticipating their requirements, generating choices, making decisions and implementing them, they eliminate anxiety and enhance their chances for success.

There are legal tools, financial tools and others that blend these two areas. Careful communication among business partners, attorneys, accountants and other professionals can also make the difference between success and failure.

 

Legal Tools.  Entrepreneurs decide how to structure the enterprise to accomplish objectives such as tax treatment, continuity of the business, liability management and levels of complexity or simplicity. It is wise to rethink those decisions from time to time and consider whether the choice of entity (sole proprietor, partnership, LLC or corporation) still helps advance the goals. Should you continue operating your business in the present form, or would a change make sense?

Business owners should also consider the relationship between their personal and business financial situations. Have you reviewed your personal estate plan lately? How about employee ownership issues and gifting to relatives, friends, and key colleagues? Think through how your personal life, business operations and state/federal laws have changed. Work with your lawyer and accountant to figure out various options and the tax and control consequences of each choice regarding wealth transfer.

Related to these transfer issues is how the enterprise treats compensation of both owners and key employees. There are many techniques available for transferring income year to year. Again, assess these from the dual perspectives of control and tax impact.

 

Financial Tools.  In operating a business, it’s essential to review your financials from time to time to help compare where the business is now to where you want it to be. Owners rely on three specific financial statements for this ongoing assessment:  the balance sheet (reporting assets, liabilities and equity), the income statement or profit/loss statement (showing income, expenses, and net profit/loss) and a cash flow statement (managing that scarce resource in business operations and investment). Quality professional advice from an accountant helps interpret and understand how these various numbers relate to the enterprise so the owner can lead and adjust, rather than react.

For succession planning purposes, you use these same tools but determine what it is going to take for the owner to depart in a planned fashion, or what it is going to take for the next owner to buy the business if the change happens ahead of plan (for example, because of disability, incapacitation or premature death. The ultimate value of the financial statements depends on how accurately they reflect actual performance in order to rely on them for making future decisions.

As you consider the future, you must generate projections regarding internal challenges as well as what is going on in the marketplace, including competitors, suppliers and customers. Take care to incorporate historical trends, infusions of debt and/or equity, and other factors particularly relevant to your enterprise.

The last key financial piece is business valuation. Valuation experts should be engaged from time to time for formal analysis. Owners should also check with trade associations and industry journals for comparison data. Both the present owner and the likely future owners need to determine their respective objectives in order to negotiate mutually acceptable exit/entrance strategies.

 

Legal and Financial Combined.  The wildcard that allows for maximum control of the desired outcome is an effective buy-sell agreement. We all know we won’t live forever. We can anticipate exit strategies either on schedule or out of sequence. By planning for the options and negotiating mutually agreeable results before the pressure of a crisis, the entrepreneur can maximize wealth preservation and transfer success. Like the proverbial umbrella, it’s best to have it before the storm clouds gather. Be sure to engage a lawyer to help you with your buy-sell agreement.

To make the buy-sell effective, you must fund it. Pull together the pieces regarding financial and legal planning to determine costs involved for major alternatives. Then line up the appropriate financial instruments to achieve the desired control, tax and transfer results. Typical funding tools include life insurance, annuities and sinking funds, unless existing cash flow is sufficient to carry the ongoing enterprise as well as compensate the exiting owners or their heirs.

 

Attorneys and Accountants.  A knowledgeable attorney and business-oriented accountant are invaluable to a business owner. Attempting to run everything on your own without professional advice and assistance can be disastrous and can lead to the failure of your business. As tempting as it may be to save a little bit of money by avoiding attorneys and/or accountants, the money will be well-spent in the end.

 

Review and Adjust.  While you focus on day-to-day operations, once you have begun a plan for preserving the value you are building, be sure to review the plan from time to time. Internal and external factors challenge and offer opportunities. Keep tabs on others in similar and related enterprises. Pay attention to the news, including potential changes in taxes, liability management, and other relevant areas. At least once a year, if not more often, consider adjusting your plan to reflect your changing expectations and requirements. Seek feedback from your professional advisors and mentors. And enjoy the journey!

 

* Tim Leighton of Leighton Legal Group, LLC is an experienced lawyer based in Bloomington, Illinois who helps business Clients build their enterprises and plan for continuation after it is time to close the business or sell the business to someone else.

A Better Way: Preserving Business Value for the Future

By G. Timothy Leighton *

 

October 14, 2020 — Dale Carnegie advised those who are seeking success to start with the end in mind. Business owners would do well to plan for preserving the value of their business to prepare for the closing of the business or for selling the business to someone else.

 

Prepare for the Future.  Succession planning is an investment in the future for the enterprise, its owners, employees and even your customers or clients. Although the owners of a closely held enterprise typically recognize that their respective ownership interests are frequently their biggest and most important assets, as a group they often fail to plan for the orderly transition of ownership. Reaction by business partners and/or family members to the untimely departure of an owner leads to unnecessary costs of both time and money.

Business succession planning is neither simple nor cheap. And while engaging in a systematic process to define goals and implementation steps does not guarantee either a perfect plan or its ultimate implementation, the very act of planning usually itself renders many benefits to the enterprise and its leaders. The process involves educating both the present and likely future owners along with some intense interaction among them. This education should lead to better decisions along the way, and should inspire improvements in the costs of capital, whether debt or equity.

 

Analyze Your Business.  Succession planning usually begins with a “SWOT” analysis of both the business and its ownership structure. SWOT involves identification of Strengths, Weaknesses, Opportunities and Threats. The owners would focus on the needs of desires of both present and likely future owners, along with the enterprise itself. It is important to consider future ownership options and a variety of paths to transition from the present to that future. Those paths involve both financial and non-financial considerations, including how to pay during the transition, how to fund the transfer and how to accommodate both family members and key employees central to the business along with those not involved. In short: Where is the business today, where should the business end up and how will the business get there?

Today’s owners should make sure that the ultimate plan is actually written out and given to all interested parties to review. Those reading it should be invited to comment on how to make it better. Which aspects of the plan are good, and what raises concerns? Also, what is not yet in the plan that should be included? Once the key planners reach an agreement on revisions to the first draft, then the business owners should take care to review the plan periodically, perhaps at least once a year, and whenever the business either anticipates or experiences a major change, such as the disability, incapacity or death of a principal, major financial improvement or decline, or other significant change of circumstance.

 

Get Others Involved.  There are at least three vitally important groups of participants in the planning process. The most obvious would be the owners – naturally, the existing owners will be active in the planning. Those targeted as likely successor owners should also be included. A second group would involve key people who do not have ownership interests. These would include both family members of the owners as well as key employees, such as managers or those with hard-to-replace talents, all of whom will be affected by a succession. And third, professional advisors should participate, providing both guidance as well as insights into points overlooked or underestimated.

Effective succession planning demands that the participants be true to themselves and their enterprise. They simply must ask themselves the hard questions and give themselves candid answers, even if they don’t necessarily like what they hear. To choose among competing paths for achieving the succession goals, owners may have to make very difficult decisions, which may involve emotional as well as non-personal factors. Trust, patience, compromise and persistence are all elements of the process. Be sensitive to such impediments as selfishness, ego, greed, anxiety and imperial legacies.

 

Professional Advisors.  Professional advisors who can effectively contribute to your business would include:

1) An accountant, to help work through tax and valuation issues and help focus projections in realistic line with historical data;

2) A lawyer to render legal guidance, guide the parties to closure in decision making and draft documents to implement those decisions;

3) A banker and/or investment broker who will help fund the transition through debt and/or equity instruments;

4) An insurance agent who will bring relevant risk management tools to help cover the risks of premature death, disability or incapacity;

5) A financial planner who helps evaluate related issues such as retirement and personal finances; and

6) A business broker to assess value maximization along with lining up potential buyers, especially if a relative or key employee is not a likely successor.

The various advisors should work well directly with the owners and also with each other. They will each have different perceptions, based largely on their respective training, experience, and biases. The enterprise will benefit from the synergies resulting from their collective ideas and insights. They can and should debate and challenge each other in order to make the plan more effective.

 

Future articles will review some of the tools involved in succession planning along with more details on different aspects of the process.

 

* Tim Leighton of Leighton Legal Group, LLC is an experienced lawyer based in Bloomington, Illinois who helps business Clients build their enterprises and plan for continuation after it is time to close the business or sell the business to someone else.

Why is it important to have a Will?

June 3, 2020 — People have been using wills for hundreds of years as a way to provide for dependents and also to document one’s property-related objectives after death.

 

A properly drafted will can also help avoid disputes among family regarding your real and personal property. For example, the inclusion of a no-contest clause may deter an individual from attempting to dispute your will in court if the clause states that anyone who contests the will is not eligible to receive any distributions from the estate.

 

Another issue to consider is that the estate of someone who dies without a will is subject to Illinois intestacy laws, which outline distribution priorities in the absence of your legally recognized directions. Intestacy leaves the choice of who inherits your property to the default rules under state law rather than your preferences.

 

The purpose of a will is not only to provide a “how-to” manual for distributing your property. For a parent of a minor child, it is also an instruction as to who should care for the child or children in the event of an unexpected tragedy or premature death. In the absence of a will and a surviving parent or legal guardian, your child or children could be the subject of a legal battle among family and/or friends. 

 

With the evolution of technology, many people opt to use self-preparation software to draw up a will. You may think to yourself, “I don’t have much, so why should I pay a lawyer when I can fill in these blanks myself for such a small cost?” But the truth is, no software is intuitive or personal enough to advise you on what is best for your individual situation. It is also important to remember that some self-preparation programs or templates that you find online do not take into consideration the state in which the preparer resides. Estate and probate laws are different in each state. And as complex as the statutes might be, your plan may also be subject to interpretation by the courts. Templates cannot advise you on how judges would likely decide potential disputes. A clause in a will that is acceptable in one state may not be legally binding in another. Specific facts and circumstances might also change the outcome. Setting up a will on your own without the help of a lawyer can result in unnecessary challenges and costs to your family. These do-it-yourself versions might also overlook opportunities available to you and those who will inherit that you could use if only the generic software “knew” more or better.

                 

We urge you to meet with an attorney who practices estate planning service for Clients to determine what type of estate plan is best for your needs. An effective estate plan will lighten the burden on your family and loved ones after you are gone and may also achieve efficiencies and other benefits. Call us today at 309/828-7600 or send an email to ekaloupek@lawbloomington.com to set up your 30-minute initial courtesy consultation and learn more about the estate planning process.

 

What are the benefits of having a Trust?

May 4, 2020 — You might know that probate is the court process by which a deceased person’s estate is settled. What you may not know is how time-consuming and expensive this process can be. There are ways to avoid putting your loved ones through the hassle of probate and reduce the time and costs involved.

 

Trusts are one of the components of estate planning that we help our Clients focus on here at Leighton Legal Group. A trust is a great way to protect your assets from probate. By putting your assets into your trust, your designated trustee will have prompt access to your financial accounts and other property upon your death, rather than having to open an estate and wait to be appointed as executor by a judge through probate. Trusts can lighten the financial burden and they are often faster to administer than a probate estate. Probate typically costs three to ten percent of the total value of the estate and can take anywhere from six months to two years before the estate is closed.

 

A trust is a private instrument that usually remains private and is not required to be filed with the court. Pursuant to Illinois law, a will must be filed with the court shortly after death. When you put your entire distribution plan in a will without a trust, this choice can make the details of what you own and owe available to the public through court records. With a trust, the trustee can pay expenses and make distributions to beneficiaries privately instead of having to account to the court which then becomes a part of public record. You usually reduce the burdens on those who implement your last wishes through use of a trust and other important planning techniques.

 

Trusts are not exclusive to the wealthy. Even with modest net worth, your assets could still be subject to probate and your estate would likely need to go through the same process as any person who did not plan thoughtfully through probate alternatives such as trusts.

 

There are times and circumstances when alternatives to trusts are important to consider. Consult with an attorney experienced with estate planning to determine how to proceed in your specific situation.

 

We would be happy to provide you with more details about trusts, probate avoidance and more. Call us today at 309/828-7600 or send us an email to ekaloupek@lawbloomington.com to set up your 30-minute initial courtesy consultation.

Why do I need a Property Power of Attorney?

April 8, 2020 — Do you ever wonder how your finances would be handled in the event that you become incapacitated or disabled?  If you haven’t, you are not alone. While most people understand that having a will is important for financial reasons, many do not think about who would take care of paying bills and managing other financial obligations when they are still alive yet unable to do so.  Often times this does not occur to people until a family member realizes he or she has no authority to access bank accounts or any type of financial information for a loved one whose mental capacity has already deteriorated to the point where the person can no longer execute legal documents. When we create an estate plan for a Client, we typically advise the Client to have us prepare a Durable Power of Attorney for Property (“POA Property”) to manage those issues.

 

A POA Property authorizes the person of your choice (and at least one alternate) to carry out property-related transactions on your behalf if you are physically or mentally incapacitated.  Examples of property-related transactions covered in the POA Property include financial institution transactions, real estate transactions, insurance, and tax matters. It is imperative that you have total confidence in the person named as the attorney-in-fact, also known as the “agent”, since that person will have the authority to act on your behalf regarding all activities described in the POA Property. The law does set standards for the agent, who must act in your best interests.

 

We can answer questions you have related to a POA Property and other elements of an estate plan.  Remember, it is important to have a complete estate plan in place while you are able to execute legal documents.  Please contact us today to schedule your 30-minute courtesy initial consultation by leaving a message at 309/828-7600 or by sending an email to ekaloupek@lawbloomington.com.

 

Note for those who already have a POA Property: Check your current POA Property to see when you executed the document. Illinois changed the power of attorney laws effective July 2011. It probably makes sense to execute a new POA Property if your document is dated before then. We also suggest that you review whom you designated as your agent and alternate(s) to make sure those choices reflect your current wishes.

Why do I need a Healthcare Power of Attorney?

March 26, 2020 — With the spread of COVID-19 (“Coronavirus”), we are reminded of the importance of having an up-to-date estate plan in place.  One key element of an estate plan is a Durable Power of Attorney for Health Care (“Healthcare POA”).

 

With a Healthcare POA, you appoint one or more agents to implement and make key health care decisions for you, consistent with your own priorities, if your health prevents you from being able to specify your own wishes at a particular point in time.  Examples of these choices include the power to require, consent to, or withdraw treatment, including end-of-life decisions.  This legal instrument is important after an accident or illness leaves you unconscious, disabled or incapacitated.

 

If you already have a Healthcare POA, we encourage you to review it now to ensure that it reflects your current wishes and desired agent(s).  This review is especially important if you executed your Healthcare POA before July 2011, since the State of Illinois amended the power of attorney laws effective July 2011.

 

Keep in mind that when you designate an agent, it is usually important to appoint at least one back-up agent. You may create as deep a bench of successors as you wish. And you may change your mind by executing a new Healthcare POA.

 

We also encourage you to talk to the young people in your life about creating their Healthcare POA once they have turned eighteen, especially because parents will generally no longer have access to their medical records and/or lack legal authority to act after they attain legal adult status.

 

Attorney Leighton and our staff at Leighton Legal Group would be happy to help you create a new or updated Healthcare POA.  Please contact us today to schedule your 30-minute courtesy initial consultation by leaving a message at 309/828-7600 or by sending an email to ekaloupek@lawbloomington.com.