Hello and welcome to trusted podcasts. This is Blake Johnson, your host. And we’re going to talk today about business succession planning. So last time we talked about what it looks like to start your business. So let’s look what, uh, let’s take a look at what it will look like when you look to exit your business. I would just said look a lot, Trust Attorney Las Vegas sorry for that. Um, anyways, so let’s, uh, you know, most people think, all right, where are we wanting to get the business established? And then down the road we’ll deal with the business succession planning. Um, unfortunately, you know, that may not be the best route. Um, you probably want to begin with the end in mind. That’s what Steve, Steven Covey always says in his book, seven habits of highly effective people. So, uh, beginning with the end in mind, where are you going to be?
What, what States you’re going to operate? Are gonna be only in Nevada or in Utah or are you going to be nationwide? Are you going to be worldwide? Those kinds of things definitely play into your business succession planning. And you need to begin within my, as far as what’s the exit look like? Is it going to be something you’ve hand down to another family member? Is it something where you sell it to an employee or do you sell it, tell it to an outside group. Um, you know, venture capitalists or just someone who wants to come in and buy the business and help ’em and take it over at that point. So a lot of different options there. Um, because that determines how you structure this, the company, when you set it up, uh, if you, uh, you could also do a public offering, so that’s an IPO, initial public offering, put it on the stock exchange, uh, and have it become a publicly traded company.
That’s a completely different thing than a family business that’s going to continue on. And it limits the, the options that you have as far as setting it up because it can be a pain down the road to switch your entity, type in and get those things in place. So, um, even when you’re just starting your business and looking at what you need to do, you want to begin with the end in mind as far as what your succession plan looks like. Now, if you’re by yourself, um, you don’t have to, other than choosing the right entity type to begin with, Trust Attorney Las Vegas that’s probably good for now. I would plan and, and make your choices that you have as far as how to run the business, setting up your systems and processes and all of those things. But I would still suggest that you have, you have an operating agreement that you get stuff in place so that your businesses is formally set up just on the off chance that something happens to you and you pass away before your, um, you know, you’re, you’re ready to sell the business.
So, um, even if you’re just by yourself, it’s still a good idea to have those documents in place. Make sure it’s owned by a trust. Um, and, or, you know, you have the, the, the succession plan in place to make sure that when you pass away, uh, your business will continue on. So if you do have partners, that’s a completely different story. We want to talk about those issues. So let’s say somebody wants to, a partner wants to leave within the first couple of years of the business when it’s up, you know, growing, there’s some hard times you want to, you want to put something in there so that your, uh, your partners are willing to it out and make it happen. So typically what we can do is we can say that if somebody leaves within the first five years, the surviving or that the remaining members can buy them out, but they get a discount on the purchase price.
So we find out what fair market value is and they get anywhere from, you know, a 10% discount up to, I’ve done one for 80% because they really wanted to keep each other involved in the business. So those are some options you have there. We also want to look at options for the business as far as, uh, what happens if a member gets disabled? Do they continue to be a member and receive the, Trust Attorney Las Vegas the income that’s generated as far as, you know, at the end of the year, whatever’s leftover on the net, uh, they just wouldn’t get a paycheck or is it something where they have to sell their shares at that point and what, what does that look like? And that’s a conversation that we need to have. That needs to be some disability insurance put in place, especially for a key person. You know, it’s the main, uh, software programmer or, um, architect of, uh, the business that, that stuff you want to think about.
Um, same thing with death. You know, what happens upon death to the family. Murders continue to collect a check. They just aren’t involved in the day to day. Can they be involved in the day to day operations of it or do they have to sell their shares to the remaining partners? That’s typically done through a buy sell agreement. And we fund that with life insurance so that there’s money to pay off the family. And if it’s not enough, then we put in terms and you can designate the terms ahead of time. You know, it’s paid over a 10 year period. Um, it’s at a flat interest rate or it’s, you know, a percentage above whatever the federal rate is or you know, short term rates, whatever you want to do there. We can be specific as we want. We can say that we don’t have to get a full appraisal. It’s just determined by this calculation or the de members or owners of the company determine what the value of the company is each year and their annual meetings.
Um, those are all different options for how to structure the business if you pass away, how, how that’s supposed to be done with partners. Um, other options you wanna look at or things to talk about is, you know, what’s the role, um, you know, of each person in the company and how does that fit into the plan? Um, are they looking to stay longterm? Are they short term just to, to get a buyout and then, you know, make a little bit of money and then continue on. So those are all things you need to talk to with your partners ahead time that will help make your transition on the business succession planning easier. Now, once it comes time to, to, um, to pass on that business, what options are you going to choose? If you want to go initial public offering, you’re going to have to be a corporation because that’s the only company that can be publicly traded and there’s a lot of regulations there.
So you’re going to have to have a corporate attorney involved from day one, making sure that anytime if you bring in a partner that that’s done properly. Do you have all the documentation, the yearly minutes and other meetings that you have? Um, because that’s going to be, you know, a very scrutinized thing when you go through the filing with the sec. Trust Attorney Las Vegas That’s the securities and exchange commission. And it’s not state specific. It’s, you know, federal. So there’s a lot of things you have to do there. So if that is your end goal, great. Yeah, it can be a lot of money made in there and you can still maintain control the company. But, uh, you’re going to have to do a lot of due diligence on that side. Um, if you want to just pass it onto a family member, you can have it, you can give it to them through a gift.
You could have it, uh, gifted to them upon death, you know, through inheritance, um, through your trust. That’d be a great way. Cause then they, they get a step up and value for the value of the business. And then if they decide to sell it, they don’t have any capital gains, tax implications. Um, or you can do a sell to, you know, a child. I just recently went through that. I, I purchased, um, my, uh, my office, uh, I PR, I bought out my dad who was my partner in that. So we had to go through, you know, how do we determine value, do all the negotiations. And I do recommend that if you do that, that you keep it truly, um, you know, a fair market value deal. Because then that way somebody is not walking away thinking, Oh, I overpaid. Or, um, or you know, mom and dad are thinking, Oh, we, we give this to you.
Um, you know, you’re being ungrateful. Those kinds of things. Um, so third party, um, it, um, mediator may also be good in actual business broker to help with considering prices and that kind of thing to determine what’s a good multiple as far as how to determine the value of the business. And then, um, you know, you can sell it to a family member. Um, on the same side, you know, if if, um, you don’t have a family member but you have a key employee that you would like to sell it to and they want to buy it. Um, once again, getting a business broker involved is a good idea. You can do the negotiations on your own. Um, but that may lead to some hard feelings. Um, so if you have an outside party that can help with that negotiation, keep it fair, fair market value, uh, I think that’s the best way to go.
A business broker is a great resource in this realm. Even if you don’t need them to find a buyer, they have a lot of information as far as how to determine value, what kind of options you have. They can put you in touch with lenders for, um, you know, the people who are buying it. So that way you don’t, they don’t have to come up with the money on their own or it doesn’t have to be owner finance where basically Trust Attorney Las Vegas they just pay you over time. You can get paid up front. Um, so it just like any other, um, you know, purchase. There’s, there’s options there is you can always get financing. You can have go in with a partner, you can, um, have owner finance. So, you know, there’s, there’s options there on the financing side too. Um, other option is you’re selling it to an outside third party.
This for sure, you need a business broker, cause I don’t think you’re going to go find a third party on your own. It’s very hard. Uh, business brokers have the contacts, they have people looking for businesses to purchase and they have, they can put ’em on the different, uh, websites and search engines for those specific, uh, those who are specifically looking to purchase a business. And then a closing is very similar to, um, you know, a close of escrow on buying a house. There is an escrow, um, uh, account opened and an escrow company handles the transaction. You’re going to sign paperwork, there’s due diligence that has to be done. There’s different reports you have to run, there’s appraisals, um, all those things. And so the escrow company and the business broker are going to help walk you through that. And once again, I just, I went through this, uh, about a year ago with selling one of my businesses and, um, very, very interesting way of handling things.
And like I said, it’s very similar. Felt just almost like I’m purchasing or selling a house. So, um, you know, just make sure you have a good qualified broker on your side. Probably don’t want to have the same one that the sellers using or the buyers using, you know, get your own counsel cause it, they may have a conflict of interest. Um, otherwise. So those are the, the main types of business succession options you have and um, you know, different things, um, that you can do to help set up the business right from the beginning. Trust Attorney Las Vegas The biggest thing is make sure you document what you do. Cause if you’re the only one who knows how to do it, your business is not going to be sellable. So we or even be able to continue if you pass away. And so you may have everything set up in your trust the right way, but it doesn’t mean that there’s a viable business there because you’re the only one who knows how to talk to the clients or produce the product. So you want to have a written system down, something that’s easy to follow. Basically a checklist that people can come in, a random person off the street can figure out how to, to make your business run. So that is your advice on business succession planning today. And we’ll talk to you next time.