Protect the Value of Your Business

Most family business owners strive to grow their business and increase their value.  What many fail to recognize and act upon is the fact that protecting that value needs to go hand in hand with growing it. 

One thing for sure if you own stock in a closely-held or family business today, there will come a time when you will not own it or control it. The question is, how will you transfer that stock? How will you sell that stock?  The hard truth is if you don’t plan for this, the value and your wealth could evaporate. 

There are three documents that are critically important in a family business to protect and preserve business value: 

1. Buy-sell agreement

2. Estate plan 

3. Company emergency management plan

Let’s dive deeper into each of these documents and why you need to have them in place.

Buy-sell Agreement

The buy-sell agreement defines, "How are we going to value our company’s stock?"   

This document is probably the number one document you need to have in your business and you need to review on an ongoing basis because things change.  You want to make sure it matches up to what's currently going on in your family and the business. 

The buy-sell agreement can also be known as the shareholder's agreement. They are actually two different documents, but very similar. The shareholder agreement is a little deeper dive in regards to the governance between the shareholders. Ultimately, both of these documents answer that question how to value the company’s stock. 

Estate Plan

The second document needed to protect and preserve business value is an estate plan.  Your estate is the total of everything you own. And the estate plan, or at the very least your will, defines where your assets go upon your death. 

If you don't define this, guess who's in charge of where your assets go? The government!  So everything you've worked for you've left up to the State to decide where your assets are going to go. No one wants this.  Get your estate plan, or at the very least your will, in place and updated.  

If you have a sizable estate with high asset value, you may have to do some more sophisticated planning, with trusts and other mechanisms to reduce taxes.  Don’t underestimate estate taxes! They can significantly dig into your wealth if you don’t plan properly.  Get your estate plan in writing, and make sure that everybody understands where your assets go upon your death. 

Emergency Management Plan

Last but not least is an emergency management plan.  This plan defines what happens operationally in the business if you don't show up at the business because of a serious disability or your death.

While it is not a legal document, an emergency management plan states “If I don't show up to work tomorrow morning, here's the plan”. It will cover items such as:

• Who is the interim president because a company without a leader will fail.

• When will the board assemble with key advisors to talk about the process for finding the new president of the company, who will do the communicating with various stakeholders, etc?

• How & what will we communicate to our customers, vendors, bank, etc. what will we say. You want to make sure everybody understands that, “We have a plan to move, here is what it is and we are OK”.   

When there is a crisis in the business, employees get nervous.  The goal of the emergency management document is to calm their fears.  This step is critical to keeping the A-players in place. If they get nervous and start departing your business because they think it's not going to last, the value of your business going out the door with them. Make sure they know they have a job and they will be paid on time.  

Do you have one, two or all three documents in place – or is the answer none? You've worked your whole life to build your business.   Don't leave it up to chance that the value will be there. 

These documents will help eliminate a lot of distress, litigation and family conflict because if there is one guarantee in life, you WILL EXIT your business. 

Prepare for it. Your family and employees will be forever grateful.