Prepared for Your Grand Exit?
I have no exit plan in place. What happens if I die suddenly before I've got my ducks in a row?
"There's a difference between an exit plan and a contingency plan," says Vistage resource Douglas Johnson. "An exit plan is the long-term disposition of your business: a sale to family, employees or a third party. A contingency plan is what happens to the business if you suddenly die or are disabled and unable to continue in your current role. Sounds like you need a contingency plan.
"How is your business owned? Is it a patriarchal/matriarchal business where none of your employees would know what to do without you? Does your business comprise the bulk of your net worth? If you have no plan in place when you die, you're putting your family and everything you have worked for at risk. Your largest asset will be stuck in probate and might need to be liquidated to pay for estate settlement costs. Or employees might fight with family members for control of the business.
"This really happens," Johnson continues. "We were contacted last year by an investment banker whose client was diagnosed with cancer in the middle of the transaction and was not expected to live to closing. The buyers threatened to walk if they had to buy the business out of probate, so we put the business into trust. Unfortunately, the owner passed two weeks before closing and we as trustees had to keep the business together for a harrowing ten days. Fortunately we were able to keep the deal together, close and take care of his widow and children by properly managing the proceeds."
"We have seen this before and it's not pretty," says Vistage member Matt Coyne. "The answer depends on the status of your shareholder (buy/sell) agreements and your will. Beyond the myriad of estate and tax issues you may face, there are some serious operating issues to address. If you don’t show up tomorrow, who runs the business? Who can deposit and disburse funds? Who owns the assets? Family members will likely jump in and try to take over. I suspect that they will merely try to close the business down in an orderly manner. Too much is lost the day you stop running it for a novice owner to keep it going. I would spend some time with your advisors (i.e., your attorney and accountant) and set up something for the unexpected -- if not for you, for those left to deal with the mess."
"If you die unexpectedly without a plan in place," says Vistage Chair and speaker Peter Collins, "the value in your company may be destroyed. The IRS will want to value the company for your estate at the time of death. By the time the business is sold, it may be worth considerably less. To the IRS, and therefore the taxable value of your estate, what matters is the company's value at the date of your death. You need a management succession plan and a personal estate plan -- two separate plans. You need to ensure that management succession is in place to protect the value of your investment. And you need an estate plan to ensure that your estate does not needlessly pay too much estate tax."
"We review succession approximately every six months," says Vistage member Aspasia D. Shappet. "All critical roles are identified and internal candidates are noted with comment as to the extent of their ability to fully cover the role with mentoring. Additionally, we noted if an outside search for replacement would be the current choice. If this is the case, we note who within the company has the ability to cover until a replacement is found -- this can sometimes be two or three individuals. In addition to creating a succession plan, it gives me the opportunity to be aware of the skills and strengths of team (staff) members that I may not interact with or hear about often."
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