Alongside earning a sustainable profit and experiencing growth, most small business owners hope to see their businesses last beyond themselves. Knowing that your business will continue to thrive even after you retire or pass away is exceptionally satisfying, but if you fail to create a perpetuation plan, your business may end with you.
Also known as succession planning, business perpetuation plans can remove doubt about what happens to your business and its assets once you are gone. Note that a perpetuation plan does not just cover what happens to your business upon retirement. Similar to a will, a perpetuation plan also ensures that whether you pass away unexpectedly or have a pre-planned exit, there’s a legal document dictating what happens to your business.
The Pros and Cons of Perpetuation Plans
Perpetuation plans are essential to give you the peace of mind that your business is changing hands in the way that best suits your wants or needs. However, creating a business perpetuation plan, or failing to do so, could carry both benefits and risks.
Pro: Creating a plan ensures your business survives beyond yourself
Among the many possibilities of what could happen to your business, many business owners opt for the following:
- Sell the business through a buy-sell agreement
- Treat the business as an inheritance (to anyone eligible to receive it; employees, family members, friends, etc.)
A written business succession plan is the only way you can guarantee that what should happen with your business after you are gone does happen the way you want it to. Otherwise, you leave your business to the fate of your state’s probate laws, which will take precedence and result in your assets getting distributed based on what’s known as intestate succession. Typically, this means whoever is your closest relative will receive all of the assets of your business.
What’s more, a business succession plan allows you to identify potential contingencies should the individual you plan to leave to cannot receive it. For example, if both you and the child you intended to leave the business to pass away at the same time, the business will go to the next closest relative based on state laws without a contingency written into a business perpetuation plan.
Con: Internal perpetuation often fails to keep a business alive
If you do want to keep it in the family, know that passing it on to your children or specific family members could result in the death of your business. Just 13% of family businesses survive to the third generation. Making a perpetuation plan that passes your business on to your children could be just as risky as not having one and having your next of kin gain the business.
The best way around this is to consider only adding a like-minded individual to the business perpetuation plan, regardless of whether that individual is a family member. If your hope is to have your business survive beyond you, you must consider carefully who most aligns to your ideals and would also be capable of running the business successfully. Depending on your situation, that person may not be a family member at all.
Important: Your Plan Must Be in Writing
Just like a will, a perpetuation plan is a legal document. For a perpetuation plan to be legally binding, it must meet the following criteria:
- Come in a written format (e.g., no verbal agreements)
- Signed and dated by you
- Signed and dated by witnesses
Attorneys are not usually required to create a legally valid succession or business perpetuation plan, but having one at some point in the process is highly recommended. The laws governing what must go into such a document vary state-to-state. Some states will treat it as a will, others may not. And legal requirements to make it wholly valid and avoid potential loophole issues could require professional assistance of some type.
The best time to begin planning for the future of your business is long before you need it. Give us a call at 650-873-1255 and we’ll be happy to answer any questions you have about business perpetuation planning.