Do you own your own business? Having a plan for your business is important to your business’ success in the market. Part of your planning should involve what will happen to your business when you retire or die, particularly if income from your business supports your loved ones. If you haven’t planned for business succession, or you haven’t reviewed your plan in a while, now might be a good time to talk with a professional for help.
There are several parts to consider when planning for business succession. First off, under Maryland law, people that die without a will leave their assets to family members based on the Intestate Succession Statute, which is codified in the Maryland Estates and Trust Code Ann. § 3-101 et seq. Generally, a married spouse with children will leave assets titled in their name, including business interests, to the wife and kids. If you are married, but have no kids and your parents have pre-deceased you, then your spouse will inherit those assets.
Now, individuals that die with a will are said to die “testate,” meaning that they have written down how they wish the things they own to be transferred to others at death. Some business owners have a will and plan which they have duly executed, which describes how they wish their assets, including the business, to be distributed. In many cases, the testator drafts his/her will to benefit a primary group of people or a single individual, such as a wife, child or other relative. It may be that the owner of a business wishes to leave the business to his wife or children.
However, there are a number of problems for an owner to simply leave his/her business interest with a spouse and/or children. For example, can your spouse or children operate the business in your stead? If you own the business with other people, do those other owners wish to continue the business with your relatives as an owner of the business? In addition, it may be that your family depends on the cash value of the business that you, as the owner, are able to draw out of the business (either by salary or by profit distributions). If those family members cannot effectively work for the business to generate income or maintain the profitability of the business, the value of the business may decline rapidly after you die.
For some small businesses, the value may be mostly tied to the business owner and his/her relationships with the business’ clients. Should the owner die, the clients may quickly decide to find another business to buy the product or service from, which means that the business value may quickly diminish as sales and revenue dwindle. If the surviving family was counting on the value of the business to continue after the owner’s death, this may come as a rude awakening, particularly in the wake of the loss.
A buy-sell agreement may be an appropriate way to solve these problems. The buy-sell agreement is a way for you, ahead of time, to agree that the people that inherit your interest in the business will sell, and the business itself or the surviving owners will buy, your business interest in exchange for money. Such an agreement typically involves the purchase of an insurance policy, and a discussion around how to value the business (such as based on book value, or based on the sale of similar businesses in the same market). The contract in combination with the insurance policy ensures that your business interest is transferred to those that value and can utilize it, while also providing a cash benefit to your family or other beneficiaries of your estate.