Confronting Procrastination

Often we are asked to meet with someone regarding the planning for the management of their business and of course this requires coordination with their individual estate planning.

Small business planning is, it seems, necessarily more involved than planning for most individuals who work as "W-2" employees. The fact that many procrastinate on "estate" planning in first place, contributes to their lack of drive to push through to a finish [as defined by their current circumstances] which leaves their business and personal affairs untidy and sometimes altogether unplanned for.

It sounds self-serving for me to tell them, that I know when to get their planning done, if they can tell me when they will die! Some see it as a ploy to get them to move forward so the lawyer/planner can be paid. However, people die everyday! I have had a family member, a very close personal friend and a long-time friend [none of whom were clients], all die this year.

In every case, the person had lead a normal life until someone found them at their desk [one case they found the person at their house] as though they were asleep. Totally unexpected that they would die at that time, by them, their families and friends!

Another instance, I am working on a business/estate plan now for someone because the man died on a Saturday, who was coming in to do estate planning on a Tuesday. Because it didn't get done, there is very complex and not entirely satisfactory planning being undertaken now.

The moral: I can tell you when you need to have your planning done, IF you will tell me when you are going to die!!!

God Bless.

Performance!

How do you integrate your ideas on acceptable and exceptional performance into a ownership incentive plan?

I do not have the answer, it is uniquely personal to those transferring ownership.

However, the goals should be achievable, concrete and absolutely must be adhered to by the company/owners!

The magic is to make the goal attainable in the minds of the covered employee(s) at the outset, fair when analyzing in hindsight, yet, make them stretch to reach them, so the business attains a benefit for the bargain, that might or most likely would not be attained by these covered employees, but for the existence of this incentive.

Wrapping Up Key Employees

A frequently important component of successful business succession planning is "tying" key employees to the company. This often takes the form of either a non-compete, or incentive based agreement to keep a person.

How do you keep a key employee without running afoul of the law when it comes to non-competes. Some professions prohibit, on public policy grounds the enforcement/validity of non-compete agreements. In other situations, you must look to the state law of the jurisdiction that you are operating in, to determine what is the likely limit to the time and geographic scope of the limitations in the agreement.

This is important, because you would rather have something that you can have confidence will protect you as the business owner, and not encourage a lawyer the departing employee hires to review the agreement [they typically never hire anyone to review it before they sign it] to challenge the agreement in court. So make it reasonable under the law of the state, is the key.

Procrastination!

A substantial challenge in business succession planning - which is in many ways estate planning/equalization of the estate including business assets for the closely held business owner, is procrastination.

So, 60 to 70% of people who die in the US, according to the most recent study I saw, do so without a Will. Thus a super-majority of individuals have decided that leaving assets using the statutes that their state legislature has drafted for them is sufficient. This in 2 of the 3 states I am admitted to practice, in means that the surviving spouse does not get everything even if the children are minors [except that the surviving spouse is typically appointed as guardian over the property for the minor children].

This psychology of the individual, as one of my favorite characters, Jeeves, is the driving force behind this procrastination. However, when you view this propensity in the context of business succession, it gets worse. Now you are asking someone to decide who gets what, when, but while they are still living. This inability to consider and decide on the terms of a transfer during life, when it involves ownership in a company they often are responsible for creating, makes the process difficult for the owner.

This in turn makes it tedious for the planner. Focusing on the issue that is in the forefront of the client's mind is the key. Is it retention of a key employee, where to find assets to equalize the estate of the non-employee child, or protecting the surviving spouse at the owner's death? Determining this issue, then isolating planning to deal with one issue at a time will benefit the owner, their family, and allow the attorney to get certain things accomplished for the client.

Not all children work in the business...,

Caveat: This is a very flexible practice area, it has to be, but ideas are discussed here, probably never all the solutions, and specific circumstances will change the discussion.

We often confront the issue of treating "different but equal" children equally, when one works in the business.

If the bulk of a business owners estate is the value of the business, it presents one set of challenges. If there is outside wealth, it is often more of a balance sheet/accounting issue on dividing assets, planning for the distribution and conditions imposed by the Testator/Settlor for use by a surviving spouse and heirs.

Different strategies can be employed, part of the fun in this practice, and the ideas do not work for everyone. In smaller companies, depending on profitability and relative assets of a son or unrelated "key man" in the company, insurability of the owner, and the end objectives, insurance to fund or partially pay for the stock at owner's death may allow division of the insurance "asset" to equalize, payment provisions for the company to fund out of earnings may work as the solution or part of the solution. Valuation, cash flow, needs of the various economic needs of the parties must be considered and a plan implemented.

Non-qualified, qualified retirement plans, bonus arrangements, etc. can be tailored to work together to meet their objectives. Willingness to do something is the key, and it must be coordinated with their estate plan, and it all must be evaluated in light of the "effectiveness" under current tax law of the various transfers.