If you are a small business owner, then you know that planning your finances and the eventual disposition of your estate is not that simple. In fact, you and your business need to plan together, and that means succession or exit planning.
A recent article on the WealthCounsel blog tells the cautionary tale of three businessmen that proves both the necessity for planning and the necessity of understanding your plan.
These three businessmen ran a once-prosperous construction company, and they had the forethought to make an agreement ahead of time concerning what would happen to the business if one of them died. Our current the economic meltdown hit the construction market particularly hard, and that company fell on hard times. As a result, the three owners put their own funds into the company by way of personal loans just to keep it afloat.
One of the partners then contracted and succumbed to a terminal disease. This prompted the question of how the proceeds of his company-purchased life insurance policy ought to be distributed. Naturally, his surviving spouse thought she was to be compensated for her husband’s interest in the company. On the other side of the table, however, the surviving partners thought the business was owed some of the life insurance money to help pay off their personal loans to the company.
It was a potential mess.
Thankfully, on the basis of the existing plan – even if it wasn’t as comprehensive as it ought to have been – the parties were able to come to a compromise.
Teaching point? Even a little planning is better than no planning at all. This case could have ended up in protracted litigation that would benefit nobody but the parties' attorneys. The parties came to recognize that having a plan in place enabled them to work together to realize its intended benefit.
You can find more information on business succession planning for Hawaii business owners here.