You’ve spent years building your business. You’ve developed the client relationships, hired the team, learned what works and what does not, and figured out how to keep everything moving. You probably spend plenty of time thinking about growth, revenue, new opportunities, and where you want the business to be a few years from now.
What many business owners spend far less time thinking about is what happens if they are suddenly no longer able to run the business themselves. If you died unexpectedly, who could step in and make decisions? Who would have access to the accounts, communicate with employees and clients, deal with vendors, and keep the business operating? Just as important, what would happen if you were still alive but unable to manage the business because of an illness, accident, or cognitive decline?
These are estate planning questions, but they are also business succession planning questions. For business owners, the two are closely connected, which is why having a will alone is nowhere near enough.
A Will Does Not Keep Your Business Running
A will can direct how you want your property distributed after your death, and that may include your ownership interest in a business. The actual transfer of that ownership interest, however, can also be affected by an operating agreement, shareholder agreement, buy-sell agreement, or other governing documents.
More importantly, a will does not create a plan for keeping the business running after you die. If your business interest becomes part of your probate estate, the person you named as executor does not simply step in the next morning with unlimited authority to manage everything. There is a legal process involved in appointing the personal representative and establishing that person’s authority.
The problem is that your business cannot simply stop operating while that process unfolds. Payroll still has to be made, employees need direction, clients expect answers, contracts have to be performed, and vendors need to be paid. The countless decisions you normally make without thinking much about them still need to be made by someone.
This is why I encourage business owners to think beyond the question of who inherits the business. The more practical question is what will actually happen to the business when you are no longer there to run it.
Incapacity Can Be Even More Complicated Than Death
Death is not the only event a business owner needs to plan for. In some ways, incapacity can create even more uncertainty because you are still the legal owner of the business, but you may no longer be able to make decisions or manage its day-to-day operations.
Imagine that you have a stroke, suffer a serious accident, develop a significant illness, or experience cognitive decline. Your will does nothing in that situation because it only becomes relevant after your death. Instead, your incapacity plan has to work together with your business documents so that the right person has the authority to act.
Depending on how the business is owned and structured, that may involve your trust, power of attorney, operating agreement, corporate documents, banking arrangements, and other agreements. Simply naming someone under a power of attorney does not necessarily answer every question that can arise inside the business.
Someone may need authority to vote your ownership interest, make management decisions, access bank accounts, sign contracts, deal with employees, or communicate with your accountant, payroll company, insurance broker, and other advisors. Even if the legal authority is clear, there is also the practical issue of whether anyone else knows how the business actually operates.
If you are the only person who knows certain passwords, client relationships, vendor arrangements, insurance information, or financial details, your business may still be vulnerable. These are much easier problems to solve while you are healthy and in control than after a crisis has already happened.
Business Owners With Partners Need a Clear Succession Plan
If you own a business with someone else, a buy-sell agreement can be one of the most important parts of your business succession plan. A well-drafted agreement establishes what happens to an owner’s interest when certain events occur, such as death, permanent disability, retirement, withdrawal from the business, or another triggering event the owners have agreed upon.
Without clear terms, your family could inherit an ownership interest in a company they know very little about. Your business partner could suddenly find themselves in business with your spouse, children, or other beneficiaries, even though no one ever intended that arrangement.
Your family may want cash rather than an ownership interest, while the surviving owner may want control of the company but have no practical way to buy the interest. Those are difficult issues to work through after someone has died, particularly when everyone involved may already be dealing with grief and financial uncertainty.
A buy-sell agreement helps establish the rules before emotions and competing interests enter the picture. It can address who has the right or obligation to purchase the interest, how the business will be valued, when payment will be made, and what happens if an owner becomes disabled rather than dies.
The Agreement Also Has to Be Funded and Kept Current
Having a buy-sell agreement is only part of the planning. The agreement also has to work financially when the triggering event actually occurs.
One of the first questions is how the business will be valued. Some agreements contain a fixed value that the owners were supposed to update periodically but never did. Others use formulas that made sense when the company was much smaller but no longer reflect its actual value.
If the valuation is too low, the deceased owner’s family could receive substantially less than the ownership interest is really worth. If the valuation is unrealistically high, the surviving owners or the business may not be able to complete the purchase at all.
The next question is where the money will come from. Even if everyone agrees that an ownership interest is worth $1 million, that does not mean the surviving owner or the business has $1 million available to complete the buyout.
Life insurance is commonly used to provide liquidity for a buyout after an owner dies. Depending on how the business and agreement are structured, the policy may be owned by the business or by another owner, but the insurance and the legal agreement need to coordinate so that the money ends up in the right place and can actually be used for the intended purpose.
It is also important to distinguish insurance used to fund a buy-sell agreement from key person insurance. Key person insurance is generally designed to protect the business from the financial impact of losing an important owner or employee, while buy-sell funding is intended to provide money to purchase an ownership interest. A business may need one, the other, or both.
Disability deserves the same attention. An agreement that carefully addresses death but says very little about long-term incapacity can leave everyone in limbo if an owner becomes permanently disabled but remains alive for many years. Depending on the circumstances, disability buyout insurance or another funding strategy may be appropriate.
Your Family Should Not Have to Figure Out the Business While They Are Grieving
The legal and financial pieces matter, but there is also a very human side to business succession planning. If something happens to you, your family may be grieving while simultaneously being handed a business they do not understand and decisions they were never prepared to make.
They may not know what the company is worth, which employees are essential, which clients need immediate attention, whether your partners want to buy the business, or what agreements you signed years ago. They may not even know where all of the important information is located.
At the same time, your employees have families who depend on their paychecks, your clients may be relying on the business to fulfill important obligations, and your partners may need to make significant decisions quickly. A valuable business can lose value surprisingly fast when the person at the center of it disappears and there is no clear plan for what happens next.
Good planning creates clarity before anyone needs it. Your family should know whether the business is intended to continue, be sold, pass to another owner or family member, or eventually be wound down, and they should know who is responsible for making those decisions.
They should also know where to find the information necessary to carry out the plan. They should not have to reconstruct your business from scratch at one of the hardest moments of their lives.
Your Estate Plan and Business Plan Need to Work Together
Estate planning for business owners is different because the personal estate plan and the business documents have to tell the same story. If they do not, the contradictions may not become obvious until something has already happened.
For example, your trust may say that your business interest passes to your children, while your operating agreement restricts transfers to family members. Your buy-sell agreement may require the company to purchase your interest at death, while your estate planning documents assume that the interest will remain in the family.
The same issue can arise with insurance. If a life insurance policy is intended to fund a business buyout, the ownership and beneficiary designations should support the terms of the buy-sell agreement rather than operate independently from it.
Incapacity planning also needs to be coordinated. If your estate planning documents authorize one person to act for you, but your business governing documents give management authority to someone else, everyone needs to understand how those provisions work together before anyone is forced to sort it out during a crisis.
This is why I do not look at a business owner’s trust or will in isolation. I want to understand the ownership structure, governing documents, buy-sell provisions, insurance coverage, tax considerations, valuation, and the practical reality of how the business operates so that all of those pieces support one another.
Think About What Would Happen the Following Monday
One of the most useful ways to evaluate your current plan is to imagine that something happened to you tomorrow. Then think about what would happen when everyone showed up for work on Monday morning.
Would someone know who was in charge, and would that person actually have the legal authority to act? Would your employees still be paid, and could someone access the information and accounts necessary to keep the business operating?
Would your partners know exactly what happens to your ownership interest? Would your family know what the business is worth, what they are entitled to receive, and who they should call for help? If you were incapacitated rather than deceased, would the answers be any different?
If those questions are difficult to answer, there may be gaps between your estate planning and your business succession planning that should be addressed now rather than later.
As a California estate planning attorney and LIFTed Business Advisor, I help business owners coordinate the personal and business sides of their planning. Through our Life & Legacy Planning® process and the LIFT: Legal, Insurance, Financial & Tax Systems™ framework, we look at how your estate plan, business structure, agreements, insurance, finances, tax planning, and succession strategy work together.
The goal is not simply to create more legal documents. It is to make sure the business you spent years building is protected, the people who depend on it know what to do, and your family is not left trying to figure everything out after a crisis has already happened.
If you own a business in California and are not sure whether your estate plan and business succession plan actually work together, contact us or schedule a 15-minute introductory call to get started.