National Clothesline

An engineer friend of mine once asked me what I thought my law practice was worth on the open market. I told him “zero,” because law practices cannot be sold like other businesses. Lawyers need to have retirement plans that do not include “selling the business.”

Most businesses, on the other hand, can be bought, sold, handed down to children, or

merged with other businesses. Those businesses can also be inherited, which cannot be done with law practices. When I die, my wife — who is not a lawyer — will not inherit my clients, my legal interest in the firm, or my law degree. Spouses of other business people, however, can find themselves the proud owners of drycleaning shops, roofing businesses, and fast-food franchises.

Worse yet, business partners can find themselves in business with such a spouse when their partners die without a succession plan. Imagine that your business partner of 30 years is eaten by sharks while diving in Turks and Caicos, and his wife — who never liked you in the first place — returns with ideas on how to make the business better, and wants the office her husband used to occupy.

Succession planning, like buying insurance, is a necessary part of living. If we are not planning to retire, we are certainly going to die one day. Ironically, if you die, your business problems are over. If your business partner dies, however, your problems may just be starting. In any event, responsible people provide for their families (and their employees) in the case of death, disability, or retirement. To do so, you need a succession plan.

The primary succession plan document for a businessperson with partners is a buy-sell agreement. When I use the word “partners,” I mean a partner in the practical sense. You may be one of several shareholders in a corporation, or a member of a limited liability company, and not technically a “partner.” In all these instances, however, there will be stock, membership interests, partnership interests, or other legal property that needs to be addressed in succession planning. A buy-sell (or shareholders agreement or operating agreement) needs to be in place to insure (1) that if you die, the value of your interest is preserved for your family and (2) if your partner dies, your business is protected from interference from your partner’s family.

Such agreements are usually financed with insurance, and your accountant can be a big help in figuring out how much the policies should be, who should own them, and how to value the business. In the legal business, we use insurance to make sure that the spouses of deceased attorneys are provided for and do not have to beg the firm for money to live. You have the same interests, plus you may want or need the business to survive your death.

Succession plans also need to take into account who will run the business after you. It could be a child, a key employee, or a person who wants to invest and become involved in the business. You need to determine various issues of compensation, legal ownership of the business, and your part in the business after you cease full-time management. Many business owners want to maintain legal control while alive, which does not always create the best incentive for key employees (or children) to devote themselves to the business.

Succession planning also requires you to know what your business is worth, and whether it is worth more in a sale than as an ongoing business operation. There are plenty of people who owned video rental businesses in the early ’80s who wished they had sold to Blockbuster instead of sticking it out. Unfortunately, succession planning may involve the decision that the business will not survive you. If that is the case, you may want to sell it now, become a full-time E-bay trader, and take up golf.

I understand that planning for the future of your business, like eating more fruits and vegetables, is not a pressing issue. Neither is having a will, having life insurance, or getting the oil changed on your car. The consequences of failing to plan, however, are well worth your attention along with other, more urgent business needs.

Tonight, take a few minutes to decide how you would like your business to go on if you, your partner, or a key employee were to die, retire, or quit. If the plan to make that happen is not in place, call your lawyer or accountant tomorrow to make that plan a reality.