When It’s Time To Go...Part Three
by Mark J. O'Donnell and Jim Schmersahl
As we discussed in the last two articles, the reality is you will not own your business forever. Business separation may occur in one or more of four inevitable events. By planning early, you can (and should) proactively take control of these transitions.
1. Orderly transfer of ownership to family.
2. Sale to a third party.
3. Death or disability.
4. Disaster (financial failure, litigation, bankruptcy, divorce, etc.).
Having covered the first two events in our previous discussions, we now focus on the potentially more urgent last two events.
It’s important to remember that the three events-death, disability, and disasters, are not distant possibilities. They can occur at any time. While the exact timing is uncertain, being reasonably prepared at all times is your best plan.
Death or Disability
A well-planned transfer of management and ownership is crucial in the event of the owner’s incapacity or death. This plan should identify a suitable successor (family member, key employee, or external party) and detail steps for a smooth transition.
As an owner you should insure any risk you cannot afford to take, and these are two of them. The insurance death benefit will help fund the transition costs to offset revenue losses or unexpected expenses during the transition period, providing a safety net for your business and/or buyout your estate.
Lawsuits
Legal challenges can be devastating for small businesses. Win or lose they are expensive and distracting for management. Even worse, the plaintiffs may attempt to include the owner’s assets in a damage award.
Here again is a risk you cannot afford to take. Liability insurance can cover legal costs and damages resulting from lawsuits. Types of liability insurance include general liability, which covers bodily injury and property damage; professional liability for service-related claims; and product liability for businesses that manufacture or sell products.
Consider implementing risk management processes that may reduce the likelihood of incidents leading to lawsuits. Examples include conducting regular safety audits, employee training, and consistently using contracts to outline terms and conditions with clients and suppliers.
To protect ownership against lawsuits, selecting the appropriate business structure is essential. Forming a limited liability company (LLC) or corporation shields personal assets by separating them from business liabilities and reduces the owner’s risk in legal matters. Keep your interests separate; new businesses go into new entities. Rel estate should have its own separate entity.
Consult legal, financial, and insurance professionals and take appropriate actions to mitigate the potential for disastrous litigation. Their guidance will help ensure you are on the right track.
Bankruptcy
Bankruptcy may result from a disaster event, sudden industry changes, poor leadership and management or just bad luck. Notwithstanding the cause, some asset protection strategies, like setting up trusts or offshore accounts, may minimize the impact of bankruptcy on you and your family; we recommend discussing strategies that may fit your situation with your attorney.
One approach is to distribute and accumulate excess business funds personally, so the funds are not easily accessed by creditors or plaintiffs. For example, a simple personal joint account with your spouse may offer insulation from creditors. These funds can be used as a cushion to survive a severe but not game-ending event without borrowing money, laying off employees, or curtailing your growth plans.
By implementing these strategies, small business owners can better protect their businesses from the risks associated with death, disability, lawsuits, and bankruptcy. Don’t put this off. Find what works for you. Commit to dealing with this, in steps if necessary, as soon as practical to avoid the potentially severe consequences of being unprepared.
Mark O’Donnell, CPA, is Partner at Schmersahl Treloar & Co. He can be reached at 314.966.2727. Jim Schmersahl, CPA, is a Partner at Schmersahl Treloar & Co. He can be reached at 314.966.2727.