By Daniel E. Drennen, II
An ownership interest in your law firm is often the single largest asset of your estate. It usually provides the majority of income XX and support for your family Understanding, realizing, developing and implementing a succession plan for the law firm is critical to your and your family’s continued well-being. This is because a law firm can transition expectedly or unexpectedly through death, disability or retirement. Accordingly, it is important to plot a course toward protecting your business and minimizing the impact a change in ownership could have on those who most depend on the firm.
Proper planning addresses a number of concerns, such as: 1. What is the liquidation value of the business in the event it has to be sold under less than favorable circumstances? What value can be realized in the event of a forced sale?
2. What are the short- and long-term financial impacts on your family? How will your family survive without the income? How will the family continue to maintain its standard of living?
3. What is the short-term impact on the business? Can the business meet its short- and long-term cash needs? Can the business even survive?
4. What is the long-term impact on the business? Can the business be transferred to a successor without negatively impacting business operations and employees? Will the transferring shareholder realize full value for the transfer?
These questions illustrate the critical need for the owner(s) of a firm to plan properly before life-changing events occur. A buy-sell arrangement, funded with life insurance and/or disability-income insurance, can be just the tool to put this plan into action, with the help of your tax and your financial-services advisors.
Problems for The Surviving Owners
The deceased owner’s heirs may:
• Insist upon an active role in management–whether or not they have the capability or compatibility to manage.
• Insist on dividends being paid, which may cause double taxation and impairment of the firm’s ability to expand.
• Threaten to, or actually sell to “outsiders.”
• Call for liquidation if they can’t get their way–resulting in the loss of jobs as well as the loss of income-building and wealth-building opportunities for the surviving owners.
• Feel insecure and their morale may sag, along with their productivity.
• Resign–further crippling the firm, causing costly replacement problems.
• Tighten up on credit because of the firm’s weakened and uncertain condition.
Without a buy-sell agreement:
• Heirs are left with an asset of real value that has no guaranteed market, that they may be forced to sell at a distressed price.
• Heirs have lost the deceased owner’s salary, but will receive no income to replace it.
• Heirs may encounter delays in administration of the estate caused by attempts to sell the business.
Protect Your Business and Family
These undesirable consequences can be minimized through the use of a buy-sell agreement. A buy-sell agreement is a legally binding contract that requires one party to sell and another party to buy a particular ownership interest in a business in the event of the death, disability or retirement of an owner. These agreements may be used by any type of business entity: sole proprietor, corporation, partnership, limited liability company (LLC), etc. Under this arrangement, when an owner dies, the agreement will assure the prompt and orderly sale of his or...