Estate Planning for Business Owners in Middle Tennessee

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The Critical Importance of Estate Planning for Your Business's Future

Building a business is hard work.  From the initial planning stages, to execution, to the day-to-day management of the business, there is a lot to do.  With so many pressing obligations, timely estate and succession planning can easily be overlooked.

Why do we recommend prioritizing estate and succession planning sooner than later?  Because your company is probably one of the largest and most important assets you own.  Protecting this asset, along with yourself and your family should be at least as much a priority as the day-to-day management of your business.  Here are some considerations as you begin the process of planning and protecting your family and your business's future. 

What's The End Goal for Your Business?

Dr. Laurence J. Peter, the man who established the famous “Peter Principle,” said, “If you don't know where you're going, you will probably end up somewhere else.”  In order for you to avoid ending up “somewhere else,” you will want to establish goals for yourself, your family, and your business.

If you are unsure of what these goals are, consider what motivates you (income, wealth, security, identity, challenge, stimulation, satisfaction, or possibly pride).  Knowing your true motivation will make it easier to clarify your priorities and express your goals.  With a clear vision of your true aim, you are more likely to avoid the trap of quick fixes, and will instead focus your energy on the most urgent concerns.  Bottom line – you will move forward.

Goals common among business owners include:

  • Enhancing the value of the business
  • Preserving the value of the business
  • Exchanging the value of the business for money with the least amount of taxes
  • Meeting personal and family needs by providing security and continuity of the business in case of the owner's premature departure
  • Leaving a legacy
  • Giving money to charity
  • Shifting wealth to younger generations
  • Rewarding key employees
  • Keeping the business (or selling the business) at the owner's death
  • Taking the business to the next level

What is Your Business Worth?

Most owners have no idea what their business is worth, but knowing its value can be helpful in achieving many goals, especially if selling the business is a potential goal.  Meanwhile, knowing what your business is worth will help in projecting cash flow, estate and gift tax planning, knowing how much insurance to purchase for buy/sell agreements, compensation planning, knowing available collateral for financing, and retirement planning.  It is a good idea to discuss business valuation needs with your estate planner, business advisors, and tax professionals.  This does not necessarily mean that a formal appraisal of the business is required (although for some goals, one might be necessary).  Often, a valuation based on a multiple of earnings can be used as an inexpensive approximation of value.

What is the Future of Your Business?

Your overall planning objective for what happens when you retire, become incapacitated, die or sell the business, may include that business's survival despite such an event.  You may want the business to proceed with your chosen successor receiving the value of your ownership interest.  Likewise, if your business has multiple owners and you are unable to continue in your role, for whatever reason, the remaining owner(s) usually wants to retain ownership and control and may not want to be in business with your creditors, surviving spouse, or heirs.

What is Your Plan for Personal Wealth Preservation and Business Succession?

Most people, whether or not they own a business, want to preserve their wealth and minimize taxes.  When a business is involved, the owner's lifetime succession and business objectives need to be integrated into the overall estate plan. 

There are thus several things to consider when incorporating business succession goals into estate planning, including:

  • The growth of non-business assets
  • How to be “fair” to children both inside and outside of the business
  • Minimizing and having the cash to pay estate tax
  • Asset protection during your life and for your heirs
  • Probate avoidance
  • Planning for long-term health care costs

Benefits of Growing and Protecting Your Business's Value

For most owners, growing the business and protecting its value will have many benefits, such as increasing the ability to sell the business, maximizing the amount realized on the sale of business, protecting assets from potential business and personal creditors, and helping to keep key employees and family members in the business.

Protecting the business's value generally involves one or more of the following actions:

  • Increasing cash flow
  • Developing operating systems (so that the system, not your personal involvement, becomes the solution and method that sustains business operations)
  • Documenting sustainability of earnings (if you are taking all the cash out of the business, it will be harder to sell)
  • Improving company performance as measured by industry metrics
  • Paying down debt

In order to grow the business and protect its value, it may be necessary to restructure the organization, solidify and diversify the customer base, implement strategies to grow the company, develop and protect proprietary technology, build a solid management team, and mentor a successor.

How is the Business Being Transferred?

The ability to sell and the value of the business are both affected by intrinsic factors (e.g. how the business has grown), extrinsic factors (e.g. the local and general state of the economy), and the effectiveness of the sale process.  Keep abreast of these intrinsic and extrinsic factors and have a strategy to maximize the value of your business in case one or more them are unfavorable.

When considering a transfer of the business, there are two basic options:  a transfer to those who are in the business (whether it be a child or key employee) or a transfer to outsiders (third party sale).  Each has special characteristics.

Sale to Children or Key Employees

Your main goal may be to sell the business to your children and/or key employees.  This can be a great motivator and help retain key employees and family involvement in the business.  To fund this type of sale, the money usually has to come from the ongoing business, so planning is critical to help reduce the risk of a buyer default and to increase the amount of money you will receive. 

In some cases, you may decide that you wish to gift part or all of the business to your children instead of selling it to them.  This can be helpful if you need to remove assets from your estate, if your children do not have the cash flow to purchase the business from you, or when your overall estate planning goals are best met by a gift of the business.

Sale to Outside Buyer (Third Parties)

There are several benefits to selling your business to an outside buyer, including receiving cash at closing, not having to finance the sale yourself, avoiding family succession issues, and increasing the speed with which you can exit the business.  This option, however, is not without its difficulties.  Everything must come together just right to successfully complete the sale of a small business.  Without proper planning, it can be very difficult to find a buyer who is willing to pay your desired price.  A third party is purchasing your business to make money and most likely will not have the same emotional attachment that you, your children, or your employees have to the business.  The numbers are going to be what matters to them.


Depending on the health of your business and your personal goals, it can take several years of planning and action to implement a business succession plan and get the other planning pieces in place.  Now is the time to begin planning for the future – even if you do not have immediate plans to leave or sell your business.  If you're located in Brentwood, Franklin, Nashville, or the surrounding Middle Tennessee area, give us a call and let our team help you begin the discussion and get you moving in the right direction.


The information in this article is informational only and does not represent a legal, tax, or financial opinion about any particular case.  Before making any legal, tax, business, or financial decisions, always obtain qualified, professional advice directed to your specific circumstances.


Read More: 

What is Estate Planning?  An Estate Planning Overview

Estate Planning Basics & Benefits

Wills Versus Trusts:  How do I know What I Need?

The Probate Process in Tennessee

Trust-Based Estate Planning

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