55: How to Pass on Business Wealth

If your books aren’t in order, you can forget about easily passing on your business wealth and about being able to sell your business.”

- Asha Wilkerson, Esq.

Episode Summary:

While you may be focused on creating a business and leaving a financial legacy, how do you go about actually passing on your business wealth? If you would like to pass on your business to your children or even just create a situation where you can quickly sell your business when you retire, this episode is for you! 

What many new business owners don’t realize is that you need to take a series of steps to set your business up for success, both now and in the future. In the episode today, we talk about forming your business as an LLC or a corporation, what to include in a business succession plan, and why ensuring you have proper accounting practices and insurance policies in place from the beginning is essential.

Tune in to hear the practical steps you need to take to ensure you can pass on your business wealth to your loved ones when the time comes.

What You’ll Learn On This Episode:

  • [02:28] The first step towards passing on business wealth
  • [03:46] How to go about forming an LLC or a corporation 
  • [04:03] Why you need a business succession plan, plus a marketing plan, or growth plan
  • [07:12] The proper accounting systems and paperwork can make all the difference in the world
  • [08:57] Why you should hire a certified public account or an enrolled agent and have a trusted bookkeeper
  • [10:42] Insurance: both key person insurance and life insurance
  • [12:06] Why you may also need errors and omissions insurance
  • [12:50] Why sharing your plan is vital to passing on your business

Resources Mentioned:

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[0:00:03.6] AW: You’re listening to the Transcend Podcast. I’m your host, Asha Wilkerson, an attorney by training and an educator at heart. This podcast is all about empowering you to build a business and leave a legacy. Here’s the thing; the wealth gap in America is consistently increasing and while full-time entrepreneurship is not for everyone, even a side hustle could change your financial landscape if you’re intentional about using your business to build wealth. I’ve run my own law firm for over 10 years, and in that time, I’ve helped countless California businesses go from idea to six figures. On this podcast, we talk about what it truly takes to build a sustainable business and find financial freedom. Let’s dive in. 




[0:00:47.7] AW: Hey everyone, welcome back to another episode of Transcend the Podcast. I’m trying something new, I’m actually sitting outside of a coffee shop/bakery, probably a bakery first then coffee shop called Third Culture Bakery in Berkeley, California, which is an awesome bakery. If you all have not done, have not been here, it’s like mochi, all mochi everything, which is absolutely delicious but the reason why I am here is because it’s just one of those days.


I’m recording this on a Tuesday and it 100% felt like a Monday, so much so that in one of my meetings said, “How was your Monday?” and the guy I was talking to was like, “Well, yesterday was great, but how was your Tuesday?” That’s just kind of how it’s going. 


I’m also waiting on my car to get out of the tire shop because when I got back into town yesterday, I drove around and realized that I had a flat tire. Hopefully, it’s just you know, a little leak or something that can be patched but if not, I’ll deal with it but it’s just kind of one of those days, you know? 


You know, you just have those days, today is definitely one of those days and then I realized that I needed to record an episode for the following week and usually I batch record them ahead of time but I had ran out of episodes so I am making the most of sitting in the sun in Berkeley California.


It’s about 72, 73 degrees and I decided just to pop up and who knows, it might be kind of fun to hear the cars passing by the street or to hear the conversations that are happening in and out or with people walking in and out of the coffee shop. 


[0:02:09.6] But today, I’m going to talk to you about how to pass on business wealth. So you know, we’re super focused on creating businesses and making sure that they’re capable of leaving financial legacies but how do you actually pass on business wealth or even just pass on a business, which could be a wealth tool in itself?


And there’s four steps that I want to talk to you about today and the first one is to really make sure that you have an LLC or corporation. A limited liability company or corporation. You have to have a legal entity and I know I talk about it all the time but in the US, you cannot sell a business that’s not inside of a legal entity. You wouldn’t be selling the business, maybe you’d be selling some of the assets that you’ve acquired but if you’re just a sole proprietorship, whatever you own through that would be passed on. Let’s say, you died through probate, if you didn’t have a will, if you didn’t have a trust. Otherwise, you could put the assets in a trust but the business itself wouldn’t be able to be passed on because you don’t have a legal entity. Those are just the rules for better or worse, they are what they are. 


So if you were thinking about passing on your business to your children or even just creating a situation where you sell your business, when you are tired of running it or want to retire, you want it to be acquired by a bigger company or corporation, you need to have an LLC or corporation, a legal entity surrounding your business to make that happen. 


So proprietorship is not it, a partnership is an agreement between two sole proprietors or between two entities, it doesn’t have any legal protection. You’ve got to encapsulate your business, your assets, your money, your business money, into a legal entity, namely, an LLC or a corporation. 


Now that’s not that difficult to do, you can come to me and I can help you, you can go to my website and form your LLC yourself or reach out to an attorney that you trust. They can help you determine their rights and proper entity for the kind of business that you want to run. So, that’s the first step, you have to have an LLC or corporation. 


[0:04:03.1] The second step though is that you need to have a plan, you probably should actually have multiple plans. The first one I’m thinking of is a business succession plan. So if you’re no longer able to run your business or if you want to sell your business or something happens to you and you can’t run it. You need to have a plan written down and put in place, so that whoever steps into your business will know how to run it and to keep it going. So that means, what are the operations, some standard operating procedures, what are he accounts that you have, where are your clients and customers coming from, that kind of a thing and how do you plan to pass that on?


If you want to sell your business, that’s going to be a really useful tool for the entity or the person that’s going to buy your business because you know, they’re going to buy your business because it’s thriving and successful but they might not know how to make sure that it continues to be successful or you will just be able to add that information, that plan, as an asset to the sales process, which makes buying your business better than buying a business that doesn’t have a plan.


Another plan that you need to have, is probably a marketing plan and if not marketing, definitely a growth plan. So how do you continue or how do you imagine acquiring either more of the market share or just continuing to grow to maintain them, the market share that you have.


If you were going to pass your business onto your children, they’re certainly going to want to know that, especially, if they haven’t been working in your business alongside of you but if you sell it as well, then the buyer would really benefit from having a plan and of course, that just makes your business more of an asset to buy than the business that doesn’t have it.


[0:05:38.3] Also, with the growth plan and the succession plan, it will help you when your company is being valued. So if you are trying to sell because you’re deciding that “I want to sell, get the money and pass the money on” or “I want to sell, get the money and invest it and leave it for whoever I want” then, having that growth plan and being able to tell the person doing the evaluation, it’s called a business valuation, how you plan on growing, that will help convey the value that your business has. 


So it’s really important to do this and it’s just good business practice to do this at least once a year because things change year over year. I was just talking with someone the other day and thinking about how Zoom, you know, probably barely existed five years ago, but now Zoom is all we talk about or you know, if someone would have said Zoom, you’re either thinking about, “Isn’t there like a Zoom Smile?” some teeth company or I was thinking, zoom-zoom, go faster. The guy I was talking to was in the acting industry and he said, there’s some kind of a Zoom camera, microphone, something like that. 


Anyway, the point is that some of these things are new and developed being in real time and that if your business plan or your growth plan or your succession plan has not been updated in a couple of years, it might be useless by the time it actually needs to be used. So it is good business practice just to continue to update that so you and your team know how you’re going to grow and how you plan to make more money and stay in business for years to come. All right, that’s number two. 


[0:07:05.2] So one, is have an LLC or corporation. Two, is to have your plans in place succession and growth and also marketing and number three, is you have to have the proper accounting and paperwork.


Now, if you’re anything like me when you talk about accounting, it might give you a little bit of butterflies in the stomach or make your heart beat a little bit faster. I could feel it now. I am not… no-no-no, I’m going to change my words around it, I will be comfortable with accounting. That’s what I’m going to say, I’m going to frame it in a positive.


A lot of times, we’re talking about numbers and paperwork, it gives people a little bit of anxiety because there is some skill and definitely some interest, it has to be involved in doing the accounting and looking up in numbers. But if your books aren’t in order, you can forget, easily passing on your business wealth and forget about being able to sell your business. 


But if you cannot properly show, where your clients are coming from, how much they’re paying, what the expenses are in your business, how much you’re paying yourself, how much you’re paying your employees or contractors, then it’s really hard to value the business that you have. and that’s extremely important to be able to do, especially if you’re trying to sell because you don’t want to sell your business at a rate that’s lower than what the actual value is. But it is your responsibility to properly capture that value along the way. 


It’s going to be too late if somebody is trying to do it after you had a catastrophic event and you’re no longer able to participate in your business or when you’re at the negotiation table and someone says like, “I think your business is only worth a hundred thousand dollars” and you’re going, “No way, it’s worth 500,000, this is all the things we’ve been able to do.” But your books don’t reflect that because you haven’t taken the bookkeeping seriously, you’re not going to get 500k. You might get a hundred, maybe even less because now, the buyer may not trust you and your accuracy.


[0:08:57.1] So make sure you hire an accounting company, a certified public account or an enrolled agent and have a trusted bookkeeper. Those two are different, the bookkeeper reconciles all the transactions that happen in your business every month and the CPA or the EA enrolled agent takes the information provided by the bookkeeper and files your taxes on that. 


A lot of places whether it’s a loan, a bank if they’re giving you a loan or a venture capitalist will look at your previous tax returns to see how profitable the business was and see what the income and expenses were. So that is really, really important if you were thinking about passing on your business well. 


I don’t want you to think that you only need to do these things if you plan to pass on your business, that’s not true. You need to do these things anyway just to be a good business owner. Well, let’s say something happens to you and somebody inherits your business. You don’t have a trust yet and you’re kid or your nephew or whoever, your friend, who is helping to wind up the business for your estate, they have an obligation to liquidate the assets and pay any outstanding expenses and then to distribute those expenses to your heirs. 


If you have not properly accounted for your business, you aren’t leaving your, you know, an inheritance that’s as big as it could be because you haven’t properly done the documentation. Also, just as someone who has had to wind up someone’s affairs before like my dad’s affairs, get your stuff together. Put it in a Google drive, put it on Dropbox, give somebody the password to your computer or something so that it is really clear what all of the accounts are, on how these business runs, what the passwords are and things like that, okay? 


So make sure you have the proper accounting because calculating the numbers is extremely important in being able to pass on your business well. 


[0:10:42.2] The fourth thing that you need to think about is having insurance. There’s two different types of insurance, you can have key person insurance. If something happens to you and you are no longer able to work in your business, then that key person insurance will kick in, that’s kind of life insurance policy. 


You also can have, I think you should have life insurance as well because what happens is, if the business owes any debts or if the individual owes any debts, then the assets from that individual be liquidated in order to pay those debts but if there’s an insurance policy that can pay out, maybe the insurance policy can pay for that and then you won’t have the people who inherit the business won’t have to inherit the business or just gives folks more options, okay? So really think about what kinds of insurance can protect you and protect the interest that you were trying to pass on when you are ready to pass that on. And, you know, sometimes life just happens and you may not be ready to pass things on but guess what? If you stay ready, you don’t have to get ready and everything will be in place. 


So you can reach out to me, I can share with you what I know about insurance. I am by no mean a licensed insurance agent. I can put you in contact with the right folks or you can reach out to somebody that you know about business insurance and say, “Hey, these are the things that I have in my business, this is what I want to protect. I want to make sure that if something happens to me, I can pass it on” or “If I am wanting to sell my business, I need to make sure that the business input is protected.” 


That also would include the errors and omissions insurance as well because your estate can be liable for the things that you do as a person even after you’re no longer here. So there can be a lawsuit filed against the estate, against somebody estate even after the person passes away if the lawsuit is still filed within the statute of limitations. So death doesn’t even absolve liability. There’s to say only two things are certain in life are death and taxes and probably lawsuits that are filed within the statute of limitations. So make sure you ask a proper insurance agent about the kinds of insurance that you might need to pass on your business or to protect your business, so that you could sell it or someone could sell it on your behalf. 


[0:12:50.2] Then the last thing that you need, number five, is to share your plan to pass on your business. You want to make sure you tell people, okay? If you were thinking about leaving your business to your kids or to your spouse or to your nieces or nephews, do they want it? Is that something that they want or would they encourage you to sell the business and then pass on or do whatever you want with the money? Would they rather have the money or would they want the opportunity to actually work inside of the business and then to decide what they want to do after they have worked it for a little while? 


So you know, share your plan with people because they’re the folks who are actually going to help execute it and make it come true. It’s like, this might be kind of morbid but it is a conversation we should have. It’s like I for example, I want to be an organ donor and it’s on my license but I believe in the states of Oregon and California that if you don’t actually tell somebody that you want to be an organ donor or even if it is on your license or your family members who get to make the decisions for you say no, that they don’t want you to be an organ donor, I believe that they can override what is written on your license. 


I am not 100% sure but I think that that may be true. So the point is that you want to tell people what your plans are to see if they want to be involved in your plans, one, and two, you don’t want to put a burden on somebody else that they don’t want and three, other people knowing what the plans are will definitely help the plans be executed and so super important to think about. 


[0:14:15.9] This was a little bit more tactical episode today and I hope that you found it beneficial. Again, if you are looking to pass on business wealth and you want to know how, here are five things that you can do: 


You need to have an LLC or a corporation. You need to have a plan, a business succession plan and a growth plan. You need to have proper accounting, make sure your books are in order. You need insurance and then you need to share your plan to pass on your business so that people can execute that plan if you were no longer able to. 


All right, those are the tactical things that you need. If you like this episode, please do not hesitate to share on social media. You can find me at Asha Wilkerson ESQ and I will talk to you soon. Ciao-ciao. 



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