In January 2022, Beresford Booth launched a new Business Legal Review and Diagnostic Service. Most of our reviews have centered around closely held businesses, whose owners routinely have 80% or more of their wealth tied up in their business. Businesses we have examined have been well run, but not perfect. As business lawyers, we frequently help our clients deal with their immediate needs, which is important work. It is of equal importance, however, that we work with our clients to help them plan for their future, including (1) diversification of holdings; and (2) succession planning.
Diversification
Believe it or not, the typical closely held business owner holds 80% of their wealth in their business. Business owners are often so concerned with “building their brand,” attracting new business, and taking care of their employees that they neglect to diversify their holdings to reduce risk.
In his terrific book Unlocking Private Company Wealth, Z. Christopher Mercer argues for business owners to diversify their holdings by borrowing against their business. Mercer makes the case that investing the proceeds from such leverage (not spending it on a boat!), can reduce owner risk through diversification. See Z. Christopher Mercer, Unlocking Private Company Wealth, 197 (2014). The argument makes sense: to diversify personal risk across time, it may make sense to borrow against the business assets and invest the loan proceeds to diversify retirement holdings. Holding 80% of wealth tied up in any one asset can be a recipe for disaster.
Succession Planning
Unfortunately, many business owners have no succession plan in place for their business. Either they have no ready, willing, or able family members to pass the business to, no willing and able employees, no strategic buyers, or they have not given succession a second thought. Every business will end, and every business needs a succession plan.
Helping business clients with a succession plan is a process that takes time. One client of mine told me that it took over ten years of planning for him to be able to purchase the family business from his father. Succession planning includes the business and estate plan. Here are some critical questions we ask our clients to help them with succession planning:
- How much is your business worth? Most of the time, business owners have no idea. As a result, we encourage our clients to obtain regular, third-party valuations to get an objective view of value and how it changes over time.
- Can your business run without you? Sale prospects and valuations are dim for those businesses that rely on one person.
- Is your business ready to transfer? Stuff happens. Whether by illness, family issues, or economic challenges, a business can end abruptly. An abrupt end can eliminate enormous value, so we work to get a business ready to transfer even when it is not for sale.
Finally, the estate plan must work with the business plan. If estate taxes will be due, does the estate have sufficient liquidity to pay them? Are there ways to reduce the size of the estate over time to reduce estate taxes? Estate planning for closely held businesses is a challenge, but a challenge we must help our clients meet.
I am fond of the saying “If you can foresee it, you have a duty to plan for it”. As business lawyers, we see many business challenges and can foresee even more. By helping our clients diversify their holdings and prepare a succession plan, we can add tremendous value, reduce risk, and manage stress.
Considerations
If these contemplations spark concern for your business, or if you are interested in specific strategic value-added recommendations, more methods of risk diversification, or assistance with succession planning, contact me via email at davidt@beresfordlaw.com, or give me a call at (425) 776-4100.