By Colin Smith | Contributor
Americans love the story of the person who pulls him- or herself up by the bootstraps. The story is a staple of our society, since the vast majority of us are either immigrants or descended from them. The small business is consistently relevant, thanks to immigration and historical catalysts. Now, the 2019 Coronavirus threatens to end the era of big-box retail and cause large firms to shrink, thereby sowing a generation of small businesses.
Any business owner will tell you that they never worked as hard for someone else as they do for themselves. Therefore, most family business owners find themselves so involved with the daily operations that they never stop to come up with an exit strategy. What happens if the owners get ill, have a family emergency, or want to retire? What happens if they pass away? What happens if a family member marries someone who upsets the dynamics of the business? While we give most of these scenarios a passing glance, the current pandemic makes it easy to realize how quickly any of these things could occur. Apart from the obvious issues, such as a lawsuit or bankruptcy, here are some things to consider when planning for the future of your small business.
Who can legally operate the business? One person may be required for the business to function. Doctors are a great example. A medical practice with one physician can be a PLLC (Professional Limited Liability Company.) However, if that physician should be ill, disabled, or pass away, the business grinds to a halt. By law, a PLLC cannot operate unless one licensed professional (in this case, a licensed physician) is able to operate it. If it doesn’t find another doctor, the business needs to terminate. The same can be said for lawyers, tax professionals, or any skilled trade. Thankfully, owners can avoid having to shut down by planning for such an emergency in advance.
Someone rocks the boat. Small businesses are often family-owned. While anything can come up, one of the more common scenarios involves an owner marrying someone who the rest of the family doesn’t like. Issues quickly escalate if the family’s “peacemaker” isn’t available or can’t broker a peace. An exit strategy helps. The strategy can be voluntary or forced, but it needs to be in place ahead of time. Buy-sell agreements are helpful tools to ensure that the business (and sometimes the family) stays intact.
Access to money and data. As a general rule, the smaller the business, the more information that lives in the owner’s head. If something should befall the owner, time doesn’t stop. Someone needs to be able to step in and take control. Payroll needs to occur, goods and services must be provided, and day-to-day operations must continue. Many of the things that used to be on paper are now electronic and password-protected, but information on the operations needs to be on paper. If bank accounts can only be accessed by one person, and power of attorney documents or other necessary legal arrangements haven’t taken place, someone will have to go to a Court to obtain the proper access or permissions, which can cost days if not weeks of time. To make matters worse, other business partners or members may spend loads of time trying to piece the operations together if they have no idea how the unavailable member ran them.
Disappearing legacy. Businesses can take a lifetime to develop and grow, and once they’re in place and successful, they invariably become the owner’s identity and legacy. The owner can elect to sell to another, pass along to a family member, or pass control to a trusted associate. If succession isn’t specified, warring opinions can paralyze affairs. To make matters worse, if the succession is sudden, inaction can cause the business to quickly fall apart. It stands to reason that a basic succession plan for control helps the organization avoid such paralysis and discord.
Estate planning. Control (or ownership) can pass in a business after an owner’s death. If the owner’s estate fails to properly address any outstanding ownership issues, uncertainty will enter while resolution pends. Such uncertainty may lead to the departure of key staff or other business partners, which can ultimately lead to the business’s failure or loss of capital.
Something that takes years, decades, or a lifetime to grow is deserving of an owner’s protection. Succession planning is a tool that is critical to the survival of any business and the partners, staff, or owners who depend upon it.
ABOUT COLIN SMITH:
Colin Smith obtained a computer science degree from University of Texas and worked as a software consultant for ten years before returning to the classroom on nights and weekends, earning his law degree from SMU in 2010. Colin finds that helping families plan for the future is most rewarding and focuses his legal career on estate and business planning, especially living trusts. Colin is a member of the State Bar of Texas, Dallas Bar Association, and the Dallas Trial Lawyers Association. In his free time, he enjoys golfing with his children, leading a Cub Scout den, attending University of Texas football and Texas Ranger games, and woodworking.