Exit Planning for Co-Owned Businesses: Avoiding a Common Risk

Submitted by Elizabeth J Mower on Mon, 06/25/2018 - 6:00am
Man in long-sleeved button-up brown shirt standing while using a gray laptop on brown wooden table beside a sitting woman in a long-sleeved gray sweater

Co-owned businesses present special challenges and opportunities for owners and advisors. In many co-ownership situations, the owners have noticeably different personalities and roles in the company. When co-owners have vastly different yet equally important roles, they need to take steps to protect themselves and their businesses from potentially devastating risks. Let’s look at a common situation in which co-owners take risks by underestimating their partner’s role in the company, and how advisors can use Exit Planning to help them overcome these risks.

The Rainmaker and the Caretaker

When Exit Planning Advisors work with co-owned businesses, they commonly see a pattern in how the owners delegate their duties. Usually, one owner serves as the rainmaker, taking on the role of finding clients and building the company’s reputation, especially early in the company’s life. This owner often serves as the face of the company and makes the decisions that people can actively see.

The other owner usually serves as the caretaker, playing more of a background role in terms of the company’s growth. However, this owner takes the lead in assuring that the company operates smoothly while the rainmaker brings new clients in and grows the company. The caretaker may not be well known publicly but plays a critical role in holding the company together.

The potential challenge with this setup is in how rainmakers and caretakers would need to respond if one or the other died, became permanently incapacitated, or was forced to leave the company. If a rainmaker died and the caretaker didn’t have the skills to fill that role, business development and growth could suffer, hurting the company’s value. If a caretaker died and the rainmaker didn’t have the ability to run daily operations, the systems in place to run the company could deteriorate, which also hurts the company’s value.

A common strategy that co-owners use to protect the company is a Buy-Sell Agreement. As many insurance providers and estate planners can tell you, Buy-Sell Agreements are best used as a way for owners to agree on how they will transfer ownership of the business if one of them dies or becomes incapacitated. Buy-Sells, when used properly, provide a narrow solution to a narrow problem.

However, many business owners use Buy-Sell Agreements as a catch-all solution for ownership transfers. They create and sign them when they start the business, fail to update them as the business changes, then have to sort out discrepancies when the Buy-Sell makes more problems than it solves. That’s because Buy-Sells focus on a mutual agreement between owners for a transfer of ownership upon death or incapacitation. Rarely do Buy-Sells address what happens if an owner leaves the business alive or on sour terms.

When combined with the rainmaker-caretaker setup many co-owned businesses have, Buy-Sells by themselves are entirely inadequate to completely protect against risks that co-owned businesses face. Yet, they’re the most common tool owners use to try to protect themselves and their businesses.

How can advisors address these risks without forcing owners into roles they either cannot or do not want to do?

Protecting Co-Owned Businesses With Exit Planning Strategies

Exit Planning can protect co-owned businesses more comprehensibly than any other strategy. In talking to planning advisors, they agree that co-owners must take certain steps to protect themselves if they want to exit on their terms. Specifically, co-owners should focus on three areas of their businesses.

  1. Developing Senior-Level Successors: The most effective strategy co-owners can use is developing internal successors. Doing so provides two benefits for co-owners. First, it allows the business to smoothly transition past an owner’s sudden death, incapacitation, or other permanent absence. Having employees that are trained to step into a full-time leadership role protects the business’ value. Second, since most successful business exits are funded by the business’ value, having trained successors in place protects the surviving owner’s exit and the absent owner’s family. Developing strong senior-level successors, along with other Value Drivers, is a cornerstone of Exit Planning.
  2. Installing Key-Person Insurance: Having insurance on key employees further buttresses the company’s value. It helps co-owners quickly and efficiently replace key employees who die or become incapacitated unexpectedly. This keeps operations flowing smoothly without forcing the company to come to a halt looking for a replacement. Exit Planning uses proven strategies, recommendations, and Advisor Team creation to find the right key-person insurance for each unique co-owned business.
  3. Documenting Systems and Processes: When co-owners know their roles, it becomes a part of their routine. If one of those owners dies or becomes incapacitated, those routines can die with them. Without proper and constantly updated documentation of systems and processes, things that were routine become impossible to figure out, which can damage business value or even destroy the business. Keeping systems and processes documented and up to date makes sudden ownership changes more manageable. BEI’s EPIC software helps advisors keep processes and systems documented, updated, and in one place.

Though there are many more aspects that co-owners may need to address to assure a successful business exit for both owners (and their families), focusing on these three aspects protects co-owners’ business-exit efforts in ways that some owners didn’t know were possible. Exit Planning—and more specifically, BEI’s EPIC software—helps advisors uncover risks, identify solutions, and deliver strategies that can be implemented both immediately and incrementally to strengthen the business.

Whether they’re rainmakers or caretakers, business owners benefit when they work with Exit Planning Advisors to protect against the unexpected. With the right tools and strategies, advisors can position co-owners and their families for a successful business exit, no matter how their business exits come about.



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