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Key Legal Documents for Independent Business Owners to Review in Preparation for a Wealth Transfer or Business Succession

When preparing for a transfer in ownership, many business owners find themselves primarily focused on determining the value of their company. Valuation can be exciting, as owners often see this as a representation of their life's work, and many are eager to see how the value of their business might create and sustain intergenerational family wealth. Understandably, protecting this asset is essential. If not properly protected, the illiquid nature of a private business can cause headaches for the owner and their family. Therefore, we encourage all independent business owners to follow these three steps when it comes to key legal documents in order to protect their family’s net worth and their legacy in the community.

1. Review Business Legal Documents: Most legal documents address contingencies for the death of owners and/or key employees, but do not clearly state plans for other high impact events such as disability, divorce, personal bankruptcy, termination, and retirement. It is important to consider these “trigger” events when reviewing and updating all legal documents. We recommend that owners review and update their legal documents with their advisors every 2-3 years or when a material event occurs (e.g., spouse diagnosed with dementia). Both professional documents (operating agreements, stock purchase agreements) and personal documents (trusts, estate plans, wills), should be included in this review. This proactive approach ensures that these critical legal documents reflect the current goals and needs of the business owner in order to protect the owner’s family, net worth, and legacy.

2. Coordinate Personal Estate Documents: Business owners often come to Stratus with uncertainty about which legal documents they need to have in place to protect their business and family. For example, many owners have a basic Will, but have not created General Powers of Attorney or Medical Directives. We advise all business owners to have these important legal documents in place. Intra-family disagreements about money management or the healthcare of a loved one can lead to high levels of stress and even higher legal bills, draining the net worth and overall wellbeing of a family. Having General Powers of Attorney and Medical Directives in place ahead of time help to limit or avoid these challenging situations. Additionally, if the business owner is passing ownership to adult children, it is vital that they also have proper estate documents in place. Knowing how to administer their portion of the business can alleviate potential personal and operational issues in the event of death or disability.

Further, every business owner should also get an independent valuation of their company. The value of a company is an illiquid asset, and often the largest portion of a business owner’s estate. Therefore, having an unbiased, professional valuation of the business is imperative. Based on this valuation, many owners should set up a revocable trust and title their business interest to this trust. By completing this assignment, the trust will then dictate how the asset is managed if something happens to the business owner.

3. Create a Professional Will: Sometimes called a “Business and Personal Letter”, this document details how the business owner would like their company to be managed in the event of their death or disability. This document can provide answers to questions like: Which employees will handle each task when I am no longer here? How will my family interact with the business? Who should oversee hiring and firing? Even decisions about access to passwords and the ability to take out loans should be specifically spelled out. The death or disability of an owner is an emotionally jarring event for both the family and the employees. The best remedy from a business perspective is to be proactive and to make a specific plan for how the business should run immediately following such a tragedy.

Owning a business is both challenging and rewarding. As the owner ages, it is vital that they put the right legal documents in place to protect their family’s net worth and their legacy in the community. If you would like to discuss your succession planning or have a third-party review your legal document, please do not hesitate to contact us.

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