For business owners, risk management and asset protection are essential in ensuring both short-term and long-term success, and they are also key elements in succession and exit planning. When you own a business, the time will come when you must inevitably “pass the baton.” Whether you intend for the business to stay in the family, continue in the hands of new ownership, or even if you are unsure about your ultimate exit path, it’s imperative to understand and mitigate business risks in all stages of the business’s lifecycle.
Managing Business Risks
It’s imperative for business owners to perform periodic risk assessments and maintain proper controls to ensure the security and integrity of the business’s various assets.
Physical assets: Your company’s physical assets include things like the premises, equipment, and inventory. Here, risk management involves everything from security cameras and door locks to proper training for equipment use and insurance coverage.
Human capital: Your employees, contractors, and the skill and knowledge they bring to the table encompass one of your most valuable assets: human capital. Business owners need to build a strong management team and focus on hiring, training, and retaining employees who can take on the role or specific duties for other key employees.
Employee handbooks, manuals, non-compete covenants, and non-solicitation agreements are essential tools that guide your employees through their roles and functions while under your employ and protect your business even after employment is terminated. And Stay Bonus Plans are often effective incentives that help business owners keep key employees in place through, and even after, the sale or transfer of their business.
Depending on your situation, you may also consider acquiring key person insurance on the lives of your key employees or acquiring life insurance that, if appropriate, is sufficient to satisfy financial institutions and bonding companies. Business owners often create Irrevocable Life Insurance Trusts, naming themselves as the insured and their family members as beneficiaries to protect life insurance proceeds from taxation and personal and business creditors.
Intellectual property: Your company’s intellectual property includes things like branding, copyrights, patents, trademarks, and trade secrets. When it comes to your brand, reputational risks related to things like social responsibility and environmental consciousness, for example, are common targets, especially with today’s level of social media exposure. And unlike patents, copyrights, and trademarks, trade secrets are not governed by formal government protection and can be especially vulnerable.
Business owners should start by identifying their company’s trade secrets. Your exit planning team can help you ensure their protection using nondisclosure agreements, trade secret agreements, post-employment restrictive covenants, or other security practices when necessary. Depending on the complexity of your circumstances, you may need to include an intellectual property attorney on your team.
Operational policies & procedures: Your operations include things like contracts, advertising, IT, HR, and other company and employee activities. Business owners must conduct comprehensive risk assessments in each of these areas. For example, mitigating risks related to data security is vital. Data breaches are occurring more frequently today and may cause serious financial losses and major hits to customer retention. And when it comes to employee benefits, you may consider including forfeiture provisions in Employee Non-Qualified Deferred Compensation Plans (NQDCs) and Employee Stock Bonus or Stock Purchase Plans to protect your business.
Financial controls and entity compliance: Internal control procedures help you ensure accurate financial statements, prevent fraud and embezzlement, and ensure entity compliance with tax laws, wage and hour laws, and corporate agreements. Whether your company is a corporation, partnership, or limited liability company, it should meet all state and federal requirements.
Protecting Your Assets
As a business owner, it’s important to consider how best to protect your business and yourself, including your personal assets. Before you begin the transition of your chosen exit path, you should remove personal guarantees and the use of personal collateral for business obligations from the equation. In some cases, separating a business into multiple entities may decrease the owner’s exposure to risk because it allows them to keep high-risk business activities from one entity from affecting lower-risk activities in another entity.
Buy/Sell Agreement Provisions: If you co-own your business, you may wish to consider a “Texas Shoot-Out” provision in your buy-sell agreement, which allows you to offer to buy all of a co-owner’s equity interest at any time. When this occurs, recipients of the offer must accept it and sell their interest or buy your interest at the same price and terms as the initial offer. So it eliminates a deadlock among owners with equal percentages of ownership interest.
Some buy-sell agreements require written spousal consent. Even in non-community property states, this spousal requirement can protect a business if or when the provisions of the buy-sell agreement are invoked. In addition, a mandatory buyback for minority ownership can be used to protect a company and its majority ownership in the event a minority shareholder terminates their relationship. In this case, the company agrees to redeem or purchase the minority shareholder’s shares for a value specified in the buy-sell agreement.
Estate Planning and asset equalization: By leveraging asset equalization in estate planning, business owners can make more effective use of their unified gift and estate tax credit. In addition, they may be able to transfer non-business assets to their spouse’s estate and keep their business and other high-risk assets in their estate.
Contact Altus Exit Strategies
Exiting your business requires long-term, comprehensive planning. But by starting to plan early, you can maximize your company’s transferable value and ensure the company’s ongoing financial health.
The professionals at Altus Exit Strategies, a wholly-owned subsidiary of Albin, Randall & Bennett, are industry leaders here to help your business through the Exit Planning process and other succession planning needs.
As a certified exit planner, I understand the tax benefits and potential tax consequences around timing an exit and how to pull together the right team, resources, and strategy to increase the value of your business and set you up for a successful exit. Contact me today for more information.
David Jean is the Director of Altus Exit Strategies and a Principal at Albin, Randall & Bennett, where he is also the Practice Leader of the Succession Planning, Business Advisory, and Construction & Real Estate Services Teams. David works with business owners who want to improve their business’s value before they sell through the Seven-Step Exit Planning Preparation™ process. He has worked with companies from $5 million to $50 million in revenue across a range of industries.