By Colin Smith | Contributor
Americans have a deep appreciation for the narrative of individuals who elevate themselves through hard work and determination. This tale resonates within our society, reflecting the immigrant roots of many of us. Small businesses hold a vital place in our economy due to these themes and other historical influences. However, the Coronavirus pandemic of 2019 poses a significant threat to the traditional retail landscape and could potentially give rise to a new wave of small enterprises.
Any entrepreneur will attest that the effort they dedicate to their own business far surpasses what they put into someone else’s. Consequently, many family business owners immerse themselves so fully in daily operations that they neglect to devise an exit strategy. What contingencies are in place if they become ill, face personal crises, or decide to retire? What happens in the unfortunate event of their passing? What if a family member marries someone who disrupts the business balance? While these scenarios are often brushed aside, the ongoing pandemic highlights how swiftly they can become reality. Beyond immediate threats like lawsuits or bankruptcy, it’s crucial to consider several key factors when planning the future of your small business.
Who is legally authorized to run the business?
One individual may be essential for the business’s function, as illustrated by medical practices with only one physician. If that physician is incapacitated or dies, the PLLC (Professional Limited Liability Company) must cease operations, as it can only be operated by a licensed professional. If another qualified doctor cannot be found, the business must close down. This applies equally to lawyers, tax advisors, and various skilled trades. Business owners can mitigate these risks by proactively planning for such eventualities.
Someone disrupts the balance.
Family-owned businesses are prevalent. One of the more frequent challenges arises when an owner marries someone disapproved of by the rest of the family. Situations can escalate rapidly if the family’s usual mediator is unavailable. Having an exit strategy in place—whether voluntary or required—is essential. Buy-sell agreements can be invaluable tools in maintaining business stability and family harmony.
Access to finances and information.
Generally, smaller businesses tend to have a lot of operational knowledge concentrated in the owner’s mind. If something unfortunate happens to the owner, operations cannot pause. It’s crucial for someone to step in and ensure that payroll is processed, services continue, and everyday tasks are managed. With many operational details now stored digitally and secured with passwords, vital information should still be documented. If bank accounts are accessible to only one person and essential legal arrangements (like power of attorney) have not been established, someone may need to go to court to gain permission or access—a process that can take days or even weeks. In the meantime, other partners or team members may struggle to piece together operations if they lack insight into the missing member’s management practices.
The legacy may vanish.
Building a business often requires a lifetime of dedication. Once a company becomes established and thriving, it becomes a part of the owner’s identity and legacy. Owners can opt to sell the business, pass it on to a family member, or transfer control to a trusted colleague. Without a defined succession plan, conflicting opinions can lead to organizational paralysis. Furthermore, unexpected transitions can exacerbate the situation, potentially causing the business to deteriorate rapidly. A straightforward succession plan for leadership can safeguard against such stagnation and conflict.
Planning for estate management.
Ownership or control can shift within a business upon the owner’s death. If an owner’s estate neglects to resolve any ownership disputes, uncertainty will plague the business until a resolution is found. This ambiguity can drive key employees and business partners away, ultimately threatening the business’s survival or financial stability.
An enterprise that takes years, decades, or an entire lifetime to cultivate deserves robust protective measures from its owner. Succession planning is a critical instrument for the endurance of a business and the partners, employees, or owners who rely upon it.
Editor’s Note: Reach Colin Smith at colin@colinsmithlaw.com or call 972.773.9095. www.ColinSmithLaw.com
ABOUT COLIN SMITH:
Colin Smith obtained a computer science degree from the University of Texas and worked as a software consultant for ten years before pursuing a law degree from SMU in 2010 during evenings and weekends. He finds great fulfillment in assisting families with future planning, concentrating his legal practice on estate and business planning, particularly living trusts. Colin is affiliated with the State Bar of Texas, the Dallas Bar Association, and the Dallas Trial Lawyers Association. In his leisure time, he enjoys golfing with his children, leading a Cub Scout den, attending University of Texas football and Texas Rangers games, and engaging in woodworking.
