If you’ve owned a business in Florida for any length of time, you’ve most likely crossed paths with any number of advisers. If any of those advisers typically work with business owners, they may have suggested that it is a good idea do business continuity succession planning. If you’ve never been given such advice, perhaps it is the time to look for some new advisers.
After all, you may have heard the saying…
“If you’re the smartest person in the room, you’re in the wrong room.”
What is Business Continuity Succession Planning in Florida?
Business continuity succession planning in Florida, and is most states, concerns one simple question. It concerns your ability to honestly answer:
If I could no longer operate my business, what would happen to it, my business assets and customers, my employees and my loved ones?
The fact is, your NEED for a solid estate plan in Florida at least DOUBLES if you own and operate a business for any number of reasons which include:
- Your business needs to continue operating without you.
- Your business needs to cover costs for hiring replacements or stand ins.
- Your business needs direction to be sold such as who are the acceptable buyers.
- Your business needs direction such as a formula to determine what it is worth.
- Your business needs to pay estate taxes that may be assessed at time of death.
The above 5 reasons are NOT mutually exclusive. There are many more reasons that may arise concerning the ongoing operation of your business. ALL of the above are key aspects of keeping “continuity” in your business as it goes to a transition in ownership of some kind. This transition may involve bringing in partners or hiring new management OR it may constitute an outright sale to a competitor.
It is important to anticipate what can happen and then arrive at an acceptable business continuity succession plan. Your plan should be designed around the uniqueness of your business and considering factors such as:
- The employees and partners involved
- The business entity structure
- The business assets and liquidity
- The value of the business
- The amount of insurance covering the business
How to Create a Solid Business Continuity Succession Plan in Florida?
Your business continuity succession plan will only be as effective as:
1) the level of thought put into it; and
2) how skillfully your strategy is laid out in the right documents.
Let’s address both factors in more detail below.
Who is Invited to the Party?
In addition to scrolling back up and pondering the various TEN questions posed above about your business and circumstances, you’ll need to think about the various key people who are associated with your business. This includes an experienced business succession planning attorney in Florida.
You’ll also need to consider the personalities of your loved ones and how they will react to your loss and the need to make changes in the family business.
Your goal should be to anticipate how things would go among these various groups of people in the event of such a life altering situation such as your loss.
Will someone step up as a leader? Will there be infighting? Is someone who actively works in the business positioned to take over OR would an outside acquisition be required. If business partners ARE involved, will one or more be buying out your business interest or would the company buy back a deceased partner’s interest.
When identifying key people, is there a person (or group of persons) who are most likely to WANT to take over the business? Will this person or group of persons be competent and otherwise able to step up and run the company successfully through an uncertain time.
You may want to consider factors such as the age, maturity, business experience of these key people. Also, you should consider whether the new business operators will need to hire a support team. Are there weaknesses in the new team or the company to take into consideration?
In family businesses, it is common of course to designate family members to take over the business. I CAUTION YOU that this approach may likely fail. The exception to this rule, is if the successor has been very active in the business, is highly experienced, respected and competent, and is highly motivated to step into an owner’s shoes.
If business partners are involved in the company, then the natural solution may be that one or more will purchase the deceased owner’s interest from the estate. This decision is highly critical because, if not addressed, the remaining business partner’s may have the pleasure of engaging in a protracted legal battle with the estate of the deceased owner.
The above scenario may likely strain the company to the point of closing its doors. Depending upon circumstances, the company may also be designated to purchase a deceased partner’s interest on behalf of the surviving partners. The company could then assign the interest later to any number of the partners. This may involve tax considerations and will be discussed in more detail below.
How Will the Company Be Valued?
In addition to identifying key people, the other extremely important question is how the company will be valued for purposes of orchestrating a buyout of the company. Companies today are valued by any number of formulas or approaches. Formal valuation by a CPA are an option; however, these also can be very expensive may not be otherwise necessary.
Business brokers and insurance companies also provide valuation services which may be useful. Formulas are also used such as a predetermined multiple of earnings based upon the owner benefit. A discounted cash flow analysis, used for real estate investments is also common. The formula chosen may depend largely upon the business industry and the standard practice for valuing companies in that industry.
For example, some industries are more “asset heavy” and thus a valuation of the assets of the company may be most appropriate. Other industries such as a tech companies may have substantial value that is not represented by hard assets. The important thing is that the formula used should be very clear. The valuation formula should also be agreed upon by all partners AND successors in advance. Without a clear path to valuation, there is a much greater possibility that people will disagree and decide to go to court.
Your Business Succession Plan Requires the Right Skillfully Prepared Documents
A competent attorney for business succession in Florida will understand how business continuity and estate planning form a cohesive whole.
Wills and Trusts May Need to Be Updated
When all of the above questions have been answered AND there is a comfort level and a consensus among ALL owners and designated successors, then it is time to put pen to paper (fingers to computer keys). The right Florida estate planning documents are a critical part of your Florida business continuity succession plan.
Common legal documents needed to clearly describe your Florida business continuity succession plan may include adding important sections to a Florida revocable trust agreement and/or Florida last will and testament.
Florida Buy-Sell Agreement
A Florida buy-sell agreement is a critical addition to the Florida estate plan, because it should spell out ALL OF THE ABOVE in vivid detail.
The buy-sell agreement should clearly describe WHO WILL BUY OUT WHOM in the event of the demise of any business partner. Are the partners obligated to buy out a deceased or disabled partner OR is the company directed to buy-out this owner’s interest. A “wait and see plan” may also be chosen which allows EITHER the owners OR the company to purchase the deceased owner’s interest.
As mentioned, the buy-sell agreement should clearly establish how the company or any partner’s portion thereof will be valued. If an outside third party is involved, they should be identified and terms of purchase should be spelled out in detail. This acquisition component of the buy-sell agreement should specify whether it is binding upon the company and those intended as successors.
Company Operating Agreement
The company operating agreement in Florida should also be updated to tie into the business succession plan. This can be done in any number of ways which include an incorporation by reference to the buy-sell agreement OR by separately prepared sections that direct what will happen in the event of death or disability of an owner/partner.
Durable Power of Attorney
Last but not least, it is important to update any Florida durable power of attorney to make sure it conveys the proper authority to orchestrate the sale and transfer of business ownership interest. Keep in mind; however, the durable power of attorney only applies in the event of the disability of an owner/partner as these expire upon death.
If multiple legal documents are involved, it is important to determine and describe what documents will control the process. For example, a trust document can say that the buy-sell agreement will supersede other documents in the event that the terms of certain documents appear to conflict. This is why it is so important to have ALL estate planning documents updated. All documents should align with the business succession plan. Your business continuity succession plan in Florida should be reviewed regularly to accommodate any changes in the estate or business circumstances.
All of the above could apply to the disability of a business owner/partner. In my opinion, an effective business continuity succession plan in Florida should include disability in the buy out provisions. With this of course, a definition of total disability should be included such as “totally and permanently disabled” and something like “inactivity in the business for a minimum of 90 days”. A Florida special needs trust plan may also be needed if a business owner becomes otherwise qualified for SSI disability benefits.
Another very important consideration for ANY business continuity succession plan in Florida, or any state, is how the buyout will be funded. One common approach is for the partner owners and/or the company to purchase life insurance policy on the owners.
Depending upon the strategy, the respective partners and/or the company may be the designated beneficiaries of the policy. The death benefit proceeds are then used to purchase the deceased owner partner’s interest. The business valuation and other factors should all be considered when purchasing the life insurance. The life insurance may also offer a lump sum payout in the event of disability, thus accommodating this aspect of the plan.
Depending upon the situation, it may be advisable to simply purchase convertible term life insurance to fund the buyout OR a more sophisticated strategy may be preferred using a product such as cash value whole life insurance, as this insurance is a more permanent solution that allows for accrual of cash value in the asset column of the balance sheet of the company.
It should go without saying that all of the above should be carefully considered with an experienced attorney in cooperation with your other experienced advisers.
Steve Gibbs, Esq.
This is an updated version of an original post dated April 24, 2017.
I am a Florida resident that owns a family business (the business is in my name) in the state of Ohio. My son runs the business. I would like to leave the business to my son 70% and to my daughter 30% with the stipulation that my daughter sell her percentage only to my son for $900,000. when time permits. My daughter is to receive a $2500. a month stipend until she is bought out of the business. Can this be written into my will?
Good morning Elaine, thanks for reading and for your great question. I would suggest that it would be best to accomplish your stated goal with a Trust rather than a will due to the long term nature of this distribution. A last will is generally best for very short term distributions and very small estates in my opinion. Sounds like that isn’t the case here and of course more in depth discussion is required. You’ll need expert help setting this up…will have Gene reach out to you to discuss further.
Steve Gibbs, Esq.