Most people are familiar with the term ‘will’, but those that own a business often can’t make a distinction between having a personal will and a business will. Far too often, a business owner has an unforeseen situation which could be a divorce, disability, or death. This leads to massive complications about the succession plan on what will happen with the business. Does your partner want to work with your wife? Are your children ready, willing, and able to take over the day to day operations of the business? Will your family get the value of your business should you pass away? Here are four moves every business owner needs to make when you put together a business will.
- Have a valuation method or a business valuation done within the business will. One of the questions that comes about if an owner passes away is determining the actual value of the business. As a business owner, you never want someone to come in after the fact and value your business because you’ll likely get a lower valuation than the real fair market value of the business. Consequently, it is important that you establish the fair market valuation method of the business in advance in the business will. You can use some multiple of EBITDA, Top Line Revenue, etc., but it is incredibly important this formula is within the business will. This will protect your family from getting low balled after the fact and also set a fair buyout with partners in a business transition situation.
- Get a buy sell agreement established – Once you have determined the fair market value of the business, the next step whether it be current partners or a business successor is to get a buy sell agreement set up. This agreement works the best when it is funded with some form of life insurance. The main reason you want this as part of your business will is that using life insurance within the buy sell will create the smoothest transition for your family. In the case of death, the insurance policy will be structured to buy out your portion of the fair market value of the business and then result in your family getting the insurance proceeds from the check. This way the business will transition smoothly and your family doesn’t have to worry about being involved in the business.
- What happens to the real estate? When business owners start seeing stable cash flow in their business, many owners turn next to buying a piece of real estate to house their employees or house their inventory. This makes perfect sense because as long as the business stays solvent, the real estate is essentially another retirement asset on top of the value of the business. However, there isn’t often a discussion about what will happen to that real estate if the business owner dies, especially when they have partners. The business will should clearly stipulate whether there will be a buyout of the property upon death of a partner owner or whether the family can continue to be part of the real estate?
- Force Your Family To Sell – You family may not know what to do when you pass away with the business. Since the business itself becomes almost like a family member, your children depending on their ages or your spouse may feel like they need to carry on with the business to continue your legacy. However, you may know better what should happen with the business and can stipulate that the business should be sold immediately upon your death. The key here is to lay out specific plans on what you want to see happen upon your death.
No matter what stage you are at in your business, it is never too soon to get a business will in place for your business!