Business Planning = Estate Planning

For most small business owners, there is no real distinction between your business plan and your estate plan. For your estate plan to work, you must have a business plan that effectively protects and grows your wealth, one that is prepared to withstand the shock of the retirement, disability or death of one of the principals.

Some key points to a successful integration of business planning and estate planning:

  • Begin with the end in mind, as Steven Covey suggests. You build a business not for its own sake but to achieve your own life goals while creating value for your customers. Be clear about where you want your business to be in 3, 5 and 10 years It makes no difference that the business achieves a particular financial benchmark if it does not satisfy your personal objectives.
  • Remember that the business is an asset, perhaps your largest asset. All too often, people start a business thinking of it only as a stream of income. From the outset, a successful business plan will be aiming at an exit strategy that optimizes value.
  • In a multi-owner company, take time to plan together. A well thought out and clearly drafted shareholder agreement for a corporation, or operating agreement for an LLC, will serve as the blueprint for building a successful business. Most of the time, small business owners do not bother to prepare an agreement, or they will sign some boilerplate document that they have not read, and would not understand if they did. These owners are laying the groundwork for later disputes, or even litigation. A good shareholder agreement or operating agreement will avoid disputes by clearly setting out goals and expectations, and by providing a method for dispute resolution if disagreements do arise. A good agreement will address each of the questions on the list. If you and your partner are not a good fit, it is better to find that out before you get into debt together.
  • Sooner or later everyone leaves their business, either vertically or horizontally. With enough time, and a good planning process, you have a better chance of achieving a smooth vertical exit. The exit planning process should begin two to five years before your target exit date. That gives you enough time to assemble a team (you will need a team!), devise and implement a plan, and make changes to optimize the value of the company before the transfer date.
  • Use a Compass AND a Map™! To achieve a smooth vertical exit, a business owner needs to have a sense of the direction the exit plan will take, and also needs a detailed list of steps to get to the next level. In Business Transition Planning 101, I present the LIFT Model™ of Business Exit Planning — an explicit process model to guide owners through the entire process. See the Class Calendar for upcoming classes.
  • Focus on results, not documents. We tend to think that our planning is done once the documents are signed, and, as a result, our plans don’t work. For instance, it is not enough to have an agreement between owners that one will buy the other out, without planning for where the purchase money will come from. An unfunded cross-purchase agreement is generally useless. An improperly funded cross-purchase agreement can be worse than useless since it virtually guarantees a lawsuit. To give another example, it is not enough to have your employees sign a nondisclosure agreement . You must make sure that steps are taken to keep information confidential. Finally, most plans — business plans as well as estate plans — require monitoring and updating, but that rarely happens. The result — a plan that did not work!

Successful business planning, like successful estate planning, requires mutual education, good old-fashioned counselling, careful design, clear writing, full implementation, a formal updating program, and good communication between everyone involved. In short, it requires a good planning process and a focus on the bottom line.