Entrepreneurial Estate Planning 

July 21, 2015

Over the years, a number of clients and friends have approached me to assist them with their estate planning needs. Because my legal license is inactive, I don’t draft estate planning documents. However, with over 30 years of experience in administering estates and trusts, I can often bring an insightful vantage point to the estate planning discussion. Interestingly, most of the people with whom I have recently been consulting are current or former business owners. Out of our discussions, a couple of common themes have emerged.

Much of the time, an entrepreneur’s business(es) comprise the largest asset in his/her estate. Owning a successful business ordinarily means attractive equity distributions. The owner usually wants to continue owning the business for as long as possible in order to maximize the recurring cash flow. At a certain point, however, the attractiveness of cash flow from the business must be weighed against the health, age, and working performance of the owner. This is the point at which the business owner needs to have an estate plan in place, not just for him or herself personally, but for the business. Estate planning for a business is succession planning…the process by which executive leadership is groomed to succeed the business owner when the time is right. Unfortunately, too often appropriate succession planning has not been formulated and implemented in the business, thereby potentially causing great disruption if the owner suffers an untimely death or disability.

Entrepreneurial estate planning involves decisions on when and how to monetize the value of the business. Having a succession plan in place provides greater flexibility with respect to the timing of the monetization event. 27% 18% 9% 0% Owner Readiness for Sale of Business 35% 36% Estate planning also requires a critical analysis of the business owner’s liquidity. This means identifying the assets which will provide sufficient liquidity (cash flow and easy conversion to cash) to meet the owner’s financial commitments (including liabilities related to other assets) as well as to meet the needs of his or her beneficiaries.

Related to the liquidity issue, there is another common theme I’ve found in the personal financial statements of many business owners. Often a great many closely held business interests (LLCs, real estate partnerships) are listed among the entrepreneur’s as- sets. From an estate planning point of view, there are several drawbacks with a financial statement which is heavily allocated to closely held ventures. It is oftentimes difficult to value the business (valuations are subjective), and equally difficult to calculate the return on investment. Such investments typically take years to be monetized and/or realize any significant returns. Also, these assets are not liquid and may even be cash flow negative and/or require untimely capital calls. Staying on top of a range of private equity investments requires considerable time and management skills which the entrepreneur’s beneficiaries and/or successors may not have in order to properly safeguard their values.

As business owners reach the last third of their lives, it is time for them to put a plan in place for the time they are no longer in active management mode, whether from retirement, death, or diminished capacity.

Here are some questions to consider:

1. Do you have a documented succession plan in place for your business? Does that succession plan ensure the continued valuation of your business for your beneficiaries in the event of your death or disability?

2. When is the right time to sell your business? If you wait until retirement, you may not be able to sell your business when you want or for the amount you want.

3. Apart from your business, what portion of your as- sets are tied up in closely held businesses, and how will those be managed in the event of your death or impaired ability?

4. How much cash flow will your assets generate to meet the needs of your beneficiaries and the financial obligations associated with your holdings? I have a clear bias toward investment portfolios populated with publically traded securities that generate total return (interest, dividends, gains). Not only do they provide liquidity and cash flow, but the management of financial assets can more easily be delegated to professionals than can closely held business as- sets. From the vantage point of the business owner’s beneficiaries, there is probably a strong rationale to eventually achieve a nearly 100% allocation to public securities among investment assets.

Business risks can be mitigated with a well-planned succession plan or with the sale of the business. Investment risks can be delegated to a profession- al investment advisor who can build a liquid and diversified portfolio of publicly traded equity and debt that will produce cash flow through all business conditions. Entrepreneurial estate planning should encompass both types of risk management.

AUTHOR:

MALCOLM BUTLER, JD