so i'm breaking down this presentation into three key parts inheriting a business how does it work generally uh you know what happens when you pass away how does probate factor into it the second part is wills versus trusts i've had a lot of clients reach out to me over the last few years wanting for example to start a trust to on their house on their business without ever really having a comprehensive estate plan in place so we're going to talk about how you can make trusts work in the context of a succession plan and then the last point is succession plans themselves i know it seems a little counterintuitive just end with succession plans but it's important to lay the groundwork for what a succession plan really is and what it does for you so we'll talk about succession plans not just for when you pass away but when maybe you're ready to retire or do something else with your time and you want to make sure that your business stays going or you want to make sure that you're getting the most you can for it so we'll talk about some of those points as well let me make a few key points in this first topic here in terms of how a business is inherited the first point i want to make is that your business is property in your hands it's it's sort of odd to think of your business as you know being functionally the same as a car or a house or some jewelry but ultimately it is property that belongs to you it's property that can stand to be inherited by your heirs or beneficiaries typically when you sell your interest in a business is considered gain on the sale of an asset or assets in the case of a single member llc but you know for a multi-member llc for corporation for an llc tax as a corporation you're holding a capital asset same with a you know a partnership so you could be looking at if you ever sold it capital gains treatment when you sell a single member llc that's just treated as a disregarded entity or if you sell your sole proprietorship to someone it's considered a sale of all the assets that the business holds but you know whether it's one or many assets the point is your business is an asset and the reason i say that is because you know i get a lot of uh questions from clients who are going through estate planning or you know just trying to tighten up asset protection strategies they want to keep their llc out of the reach of creditors they want to keep their their house out of the reach of their creditors by putting in an llc and one of the big reasons that doesn't work as a strategy is because your llc is itself property so if you put your house or other assets into the llc that llc might be subject to credit or liens or seizure just the same as your other property so it's a very important point to understand as we lay the groundwork here your business your ownership interest in your business it's your property ultimately the second thing i want to point out is that your property at large is disposed of by your will and what that means is you know you look at your state when you pass you typically have a house in most circumstances um cars jewelry personal effects um objects sentimental value and you have your business your shares in a corporation your membership interest in an llc that's all property that gets roped into your state and needs to be administered through your estate and i say that because one of the biggest requests i get from people when i am helping them get started with their new company is you know planning for succession a lot of people ask me well can't we just write in the company's operating agreement or by laws or other governing document of the company who receives the company and the answer is ultimately no because your interest in your company again is property and that property would ultimately go to your heirs your beneficiaries under your will or under the laws of intestine if you don't have a will but that property can also be used to satisfy judgments of predators of the estate you know if for example your state has 200 000 in debt and your only real asset is your llc uh the creditors are going to have a valid claim against the estate probably to go after the estate's assets which includes the company so if you were to dictate in your operating agreement that your llc is going to pass automatically to someone that could be in violation of the rights of the estate of your state's beneficiaries of its creditors and so it typically doesn't work you need to think of your business as property that's going to be taken care of through your personal estate much the same as your other property point number three and this is a fun one um management of your business during probate is complicated probate if you haven't heard of the term before it is the the process it can be kind of a lengthy process where your personal estate is being administered in accordance with your will or new mexico law generally there's a a personal representative or an executor appointed who's going to oversee your estate collect all the assets and you know pay off the creditors and then distribute what's left to your beneficiaries as you provide in your will the the process of probate can take anywhere from a few months to a few years depending on how large your state is how much of it is liquid or easily liquidated versus how much of it is tied up in for example uh you know five-year non-renewable bonds for example um things that aren't immediately convertible so you know you think of everything is going into your state um including your llc for example how does it get managed in the meantime this is where and we'll talk about this in section three but this is where your succession plan really needs to um be focused and comprehensive like multiple pieces of puzzle working together because you're the executive of your state is going to have the voting power for your shares of a corporation or your units of an llc for example so your executor the executive of your state will have the power to vote in instances where voting needs to happen but your operating agreement for example could provide for someone else to step in as manager particularly if your company has multiple owners usually in that situation the surviving owner would step in as manager the executor still has voting power but the management of the company is seen to which helps promote continuity you know usually if your personal representative is a close family member your spouse your kids you don't want them to suddenly have to take on the management of your business especially if they've never been involved before so it helps to plan ahead for these sorts of situations maybe having a trusted employee or an owner someone who can step in to assume management responsibilities when trying to wrap your head around this it helps to look at a few case studies these are a few examples of you know how things might play out in any given situation i have to do that thing that lawyers do where i caution you that these are gross simplifications these sorts of situations i mean results may vary based on a number of factors that i just don't touch on in the case study it's really meant to just give you kind of a base level understanding of how things play out in some set of circumstances or another so let's look at the first case study here we've got the owner of a single member llc treated as a disregarded entity that means the llc has only one owner and it hasn't elected to be taxed as a corporation either c corp and s corp because by default a single member llc that doesn't elect to be taxed as a corporation is going to be taxed as what's called a disregarded entity it's the same as a sole proprietorship the owner reports all the profits and losses on his or her personal tax return every year form 1040 schedule c so that's what we're dealing with right here so the owner of a single member llc treated as a disregarded entity passes away he doesn't have an operating agreement for his company um never created the document that governs how the company is run how voting happens things like that and his will is not specific as to what would happen to the company you know he's got a will uh just leaves everything to his three children and equal measures his spouse's predecessed him you know spouse passed on before him so we've got a situation where the owners passed away he has will no operating agreement three children what happens to the company here to figure that out we look at two things we look at the will and because there's no operating agreement we look at the new mexico limited liability company act because the llc act it provides for what's called default rules it's just a set of rules and guidelines for the llc's operation if there's no operating agreement one of the reasons you have an operating agreement is because it's more specific as to how things should run in your company and it also can supersede a lot of the provisions in the llc act so it lets you customize things a bit but there's no operating agreement here so we look at the llc act and start from the ground up as i mentioned earlier um you know the llc is property to the owner but more importantly here the property of the llc is treated as separate from the owner under the llc act so let's say the at the llc has a number of assets inside of it the llc as a whole as a container is treated separate from its owner so you know the the owner's membership interest is treated as property the owner but the llc's property is property of the company so what's going to happen is the estate is going to take the llc the executor or personal administrator or personal representative of the estate has the right to administer the llc so again they have the right to vote the shares as it's called they can vote on any key issues since it's a single member llc they'd be able to administer it outright making decisions as to how to proceed with the business whether to keep it going or shut it down side legal note the the owner when an order passes away they're treated as having what's called dissociated from the company the estate stands in their shoes as the assignee until whoever gets to take the company under the will takes the company so you fast forward a little bit the estate goes through its probate process and then at the end of that probate process or at some time during it the executor is going to have a lot of discretion because the will was not specific as to what happens to the company it just the will leaves all of the decedent's property to his three children so the executor has a lot of latitude here they can you know distribute the company in equal measure to the three children so the three children become one-third owners of the company if for example you have a situation where maybe one or two of the children are involved but not all of them the executor could balance out the value of the estate and distribute the company to maybe one or two of the children and just give the third child more in terms of other assets or compensation the executor could also sell the company off with the proceeds less the executor's administrative costs distributed out to the errors or lastly the executor could just say you know what i don't want to deal with this this company isn't going to be easy to sell i'm just going to close up shop sell off the assets whatever i can get for them and that's what the heirs are going to get you see the problem with this is that maybe you want one of these things to happen but you weren't specific and so now it's up to someone else to make the decision for you that's why it's really important to have some specifics in your will you know skip on to case study number two uh where we're going to look at some similar situation but some key differences so we've got in this one the owner of a multi-member llc treated as a partnership because a multi-member llc or multi-owner llc is treated by default as a partnership for tax purposes unless it elects to be taxed as a corporation so in this case we've got a multi-member llc trade as a partnership one of the owners passes away to be clear not all the owners just won the company has an operating agreement that has two key provisions that the owners insisted on when they drafted it one states that uh it provides for who's going to receive each member's ownership interest upon their death the operating agreement specifies that in this case the deceased member's interest will go to their best friend the other key provision in this operating agreement states that the surviving members will have the right to buy out the deceased members interest from his successors the deceased member again has no surviving spouse but has three children who would inherit equally from their estate what would happen here touching on some key points that i raised earlier um the deceased member's interest in the company still treated as property the owner and the estate has a property interest in the llc notwithstanding the operating agreement so you remember that provision in the operating agreement that said who the company's going to go to it doesn't quite work that way because again the estate has an interest in the llc the estate might have an interest in it for the the heirs but it certainly has an interest in it to make sure that the creditors get paid the creditors of the estate so that part of the operating agreement is probably not going to be enforceable uh you know i've seen some circumstances where that provision of the operating agreement lines up with what's in the will in which case great but the will governs here the operating agreement doesn't um and you know you follow a situation like that to its natural conclusion if the best friend were to somehow get a hold of those llc interests the estate could sue any number of people including that best friend and a business partner whatever to try and claw back that ownership interest so you really have to be careful in how you're handing these things off the other part of the operating agreement though providing that the remaining members can buy out the deceased members interest is typically very enforceable and one of the things we're going to touch on not in this seminar but in the one later this week is how you finance things like that we're going to talk about key man insurance and other financing mechanisms that would let the company do that when a member passes without financially burdening themselves at the time it tends to be something of a win-win um for the estate uh which probably doesn't want to deal with the company and for the remaining members who probably don't want to deal with the estate or the the deceased members children or spouse as business partners so you know that provision of the operating agreement is very common and it's typically enforceable while that process is ongoing however um the estate again the executor of the estate is going to stand in the shoes of the deceased member for voting purposes so the other members are still going to have to deal with the estate as a presence in the company and of course to the extent the owners have fiduciary duties to one another duty of loyalty for example uh to the extent it applies the that duty extends to the estate of the deceased member so you really have to watch out and make sure if you're one of those surviving members that you're not doing anything untoward that would disadvantage the estate as a temporary owner of the company so before i move on to wilson trusts i'm going to look at the q and a's and see if we have any questions that i can answer before moving on and again we'll circle back at the very end of the presentation to take questions about anything i had a question i had just two points on that slide 11. okay what you had talked about what if there are minor children uh you had talked about that what if there's minor children in this and also if you do are inheriting a business and you don't have a will or something how long would this process take great questions in terms of minor children it can be a little hit or miss here it gets into parts of probate law i don't really practice in but um you know when i'm devising an estate plan for someone and they have minor children who they want to take their business or to you know reap the profits of the business or maybe have the business sold for the benefit of their children that's really where trusts come in and i'm going to touch on that a little bit in the next section but it's really important to have trusts in place for the benefit of minor children if we're talking children who lack the capacity to administer the llc and you don't have a will and don't have trust in place um the laws of intestacy kick in and there might end up through probate um you know the courts themselves might insist on the creation of a trust for the benefit of those minor children who would stand to inherit you know for example you're not going to hand off the ownership of an llc to an eight-year-old it's just not going to happen and you're probably hopefully fingers crossed not going to find a judge who does that either your next question having to do with how long it takes i've seen probate take three months when there was a will in place there wasn't a lot of complicated um you know there was a lot of complication with the assets the decedent had you know bank account some property that wasn't subject to liens or financing and anything like that all of the heirs the beneficiaries got along fabulously there was no dispute or controversy that took about three months just because of the mechanics of going through probate um i have seen non-contentious probate just with complications like like i said financing um you know banks are involved that have liens on houses and community property and whatnot i've seen it take six months to a year and i've seen contentious probate which is the children don't get along one of them's gonna challenge the will or whatnot i mean i've seen those take two to three years and meanwhile the beneficiaries you know the executive of the estate is keeping on top of the property uh they're probably spending a small fortune in legal fees but the heirs themselves probably aren't going to get a hold of any property until the probate is mostly resolved you know keep in mind you know i'm covering this because it's important to understand in the context of succession plans but um really a good idea if you ever have you know questions about your unique situation because everyone's situation is very unique in this regard uh reach out to an estate planning attorney or you know reach out again to your sbdc liaison who can point you towards some helpful resources to you know get you where you need to go okay so the topic of wills and trusts um there are two key parts of your estate plan that do different things wills dispose of your personal property that's property you personally own in an orderly fashion trusts um by contrast their their vehicles to administer and hand off property specifically given to the trust notice i've got that underlined because a trust does nothing for you if it has not been assigned property to administer when you look at an estate plan as you know a series of different pieces lots of folks have trusts but um pretty much everyone should have a will i mean i can't think of a case where you should not have a will there are plenty of cases where maybe a trust isn't really going to do anything for you but everyone should have a will because like i said the trust deals with certain property the will deals with literally everything else in your personal estate so you want to make sure that it is in place um because again if you personally own your business and it's not handed off to a trust it's your will that's going to govern what happens to that company for the most part before i get to this case study i just want to cover a little bit about what trusts are there's two kinds of trusts there's the what's called revocable r-e-v-o-c-a-b-l-e also called a living trust and then there's an irrevocable trust i-r-r-e-v-o-c-a-b-l-e irrevocable um big difference is a revocable trust it's something that you can put property into as the creator and take property out of typically when we deal with llc's and whatnot we put them into revocable trusts so that the owner can take them out if they want to sell or convert the llc the owner will receive the income from the llc through pass-through approaches and um the llc's will be administered through the trust irrevocable i've got a lot of people who are asking me about irrevocable trust for their llcs i don't really recommend them in all but the most severe cases because an irrevocable trust once you put property into it belongs to the trust for the benefit of its beneficiaries you cannot take the property back out as the creator so for most people they want a level of flexibility with their llcs and corporations that you're not going to get with an irrevocable trust so when i'm talking about these case studies i'm probably talking about the first kind revocable or living trusts where you have some flexibility put stuff in take stuff out looking at case study number one jim has a wife two children and no will jim passes on suddenly what happens new mexico just like it has an llc act that deals with llc's that don't have operating agreements we have what's commonly referred to as the laws of intestacy that deal with situations where the owners don't or i'm sorry where the decedents don't have a will uh what typically happens it's a one-size-fits-all approach that was created by the legislature um it really is created by a committee of uh lawyers who drafted recommendations that the legislature adopted but it really is a one-size-fits-all approach the wife would typically inherit the marital community property and then anything that's jim's sole and separate property would be divided between the wife and two children according to a formula it's pretty simple which works for some people not for others but it also does tend to complicate probate because if you have a will it can be pretty simple to distribute property according to a will especially if it just says everything to my wife or everything to my children it does not work that way with the laws of intestine because first you have to figure out what those laws are and then second you have to figure out how they apply to your property which means you're probably going to have to deal with a lawyer or at least some kind of uh help service so a will is going to make things simpler and quicker for your beneficiaries your surviving spouse your heirs and what have you but now let's look at case study number two and this is kind of important because um it can illustrate what uh you could do with the trust here jim has a wife two children a will and a trust that was set up to hold his business interests jim passes on suddenly what happens um when you have a trust you name a trustee and you name a substitute trustee usually when i set up these revocable trusts for business owners to put their businesses in they themselves are the first trustee the business owners the trustee so they could administer the business as trustee for the trust that owns it similarly they can decide okay we're going to give this back to the grantor nice and simple but then when the business owner passes the trust document should specify who takes over as trustee usually it's the same person as the personal representative of the estate but it doesn't have to be i've seen trustees who are the trusted long-time business manager while the surviving spouse is the personal representative of the estate um you can really get flexible and you know customize these trust documents so the trust is going to administer the business the substitute trustee will um until something in the trust triggers a distribution of the company to the beneficiary specified in the trust to be clear the beneficiaries of the trust do not have to be the same as the beneficiaries of the will for example jim has two children but maybe he only wants one child to take the business so he can specify that in the trust um but more importantly and this is kind of touching on the question i you know it just answered a few minutes ago a trust doesn't have to terminate right after the creator passes away let's say jim's two children are ages 8 and 11 and jim wants the trust to own the company and manage the company for the benefit of the children until both children turn 21 and then he wants the children to get the company 50 50. you can do that in a trust and so you can see to the needs and long-term care of other um you know of your beneficiaries so you know looking at why you use a trust it's great for a business continuity plan if the trust owned your business and then you pass and your substitute trustee knows how to run the business there's not necessarily going to be a break or interruption in the operation of the business maybe the business just keeps running smoothly which is what you really want you can again designate a trustee who's not necessarily the executor of your state it can hold the business interest for years after passing um you know there's these things called rules against perpetuities which if you google it it's every bar uh every law student's nightmare rule against perpetuity is one of the hardest things we had to learn because it limits how long a trust for example can operate after its creator passes but to save you some time and grief just know that you can create these things that last for decades after your passing so you can really see to the needs of your um your beneficiaries children for example you know your children or disabled spouses or other beneficiaries maybe elderly parents people who need long-term care and who you don't want to leave all of your money to outright very common example my estate planning practice i make trusts to ensure that the creator's children have a certain amount of money to live on each year but you don't give the children all the money because they will blow through it in a casino in monaco uh client's words not mine so you know trusts there's a lot of reasons to use them and they can be very powerful and flexible vehicles in terms of your overall succession plan when you think about a succession plan you know you might google it and see it defined in some very narrow terms as you know the the the immediate handoff and continuity of operations for the business for example the plan that makes that happen but in reality succession plans they can be a lot more complicated and rightfully so because as i just talked about there's so many moving parts to govern how your company is dealt with in the event of your passing for example you've got the will for sure you've got a trust if you go that way a trust to you know make sure that the company is administered properly without it having to go through probate um i forgot to mention that is an important part of trusts by the way uh trusts are administered separately through probate the property of irrevocable trust can be used to satisfy the judgments of the estate so you know let's say your estate has a million dollars of debt and you've got a company worth 250 000 in your living trust your state can go after that company because the revocable trust isn't considered um legally distinct from you for that purpose for purposes of taxes and creditors it's it would be considered part of your state for that but you know let's say that's not a situation that's going to impact you your debt to assets isn't that kind of ridiculous you'll have a situation where you've got your trust administering your company uh your will is being probated over yonder but the probate process doesn't really impact the trust or it's running of your company so you know let's say you've got a trust that's doing that for you so that it's administering your business while your will is being probated and whatnot you also have the operating agreement or bylaws in the case of the corporation to ensure that the company is being run the way you want it to by your successors um it's important to understand you know the limits of that obviously because you know your trustee or executive your state can vote your shares or units after you pass and if the operating agreement allows them to amend or replace the operating agreement they could do that but you know it matters more i think in cases where you have an llc with multiple owners or a corporation or partnership with multiple owners because then a good operating agreement or bylaws it's going to protect those owners as well as the rights of your estate and beneficiaries and trusts so i look at an operating agreement as a key part of a succession plan or at least something that needs to be done to make sure your succession is going to go off well another part of the succession plan in my opinion involves comprehensive financial and retirement planning you want to make sure when you're ready to step away from the business and hand it off that you have the financial means to do that and you have the plan and strategy in place to let you uh do that for the long haul and so we're going to look at a few examples of what that looks like and how your company might fit into your retirement plan because you know through this presentation i've talked about what happens when you pass away but that's not the only situation where you're going to want a good succession plan so let's talk about retirement and this is one i get a lot a lot i mean i get small business owners who reach out to me because they're 60 or 70 one guy who's 83 still running his business and he just did not think he could retire without selling the company and the truth is you know it takes some creativity but there are a lot of ways that you can ease yourself out of your company you know for example you might you might sell the company you might sell it to a third party or to an employee or a manager or one of the other owners if it's a company with multiple owners uh sometimes you might bring on an employee as a part owner i see this a lot where you bring the employee on as maybe a five or ten percent owner you gift them an interest to that it doesn't create any immediate tax implication for them and then you have the company buy you out over a period of time um in a situation which sees the the company pay you for your interest it's a bit like a reverse mortgage except a bit more above board uh depending on the reverse mortgage situation i don't know how much better reverse mortgages but um you know there's situations like that where the company itself can buy you using its own earnings and profits while maybe you stay involved to some extent maybe you don't but ultimately you hand it off to your successor employee in situations where you want the employee to keep the business once you're out sometimes you want to use your company as an income generating retirement asset where you're hands off you're not involved in the day-to-day administration um you've got some trusted employees or managers maybe you cut them in as part owners to give them a true vested interest in keeping the company going and growing and profiting but you yourself are retired but still generating profit still enjoying profit from the company there are more permutations of this retirement scenario than i can count on two hands i mean i've you know i worked on three last month that were very different from one another so it's important again to look to your resources and figure out okay what are my next steps what are my priorities what's my situation what's going to work for me reach out to a good estate planning or business succession attorney chat with the sbdc i know that they've got a lot of great resources that can help you you know if not directly or with self-help and self-help and they can certainly point you in the right direction here's an example based on kind of a true fact pattern i dealt with maybe a year ago janet owns her own medical supplies reseller company she's approaching 60 she wants to step back from the active day-to-day involvement she's got kids and grandkids she wants to spend more time with and she wants to travel she just doesn't want to she doesn't want to sell the company outright she built it up with her spouse a lot of sedimental value and she's hoping it can fit into her retirement um she considers selling it if the price were right but doesn't want to partly because she expects that the value is going to go up in the next few years in this specific case because uh the company provided a lot of covet 19 testing and mitigation supplies and she expected that if code became endemic uh the company would just grow in value so she didn't want to sell it and you look at some options that she could have explored these are options that i went over with her um she could like i said appoint one of her best employees as the manager because she had a good team working under her and empower them to handle day-to-day operations while reserving some strategic decisions to herself this is always the balance my clients have a very hard time striking because it's very hard to run your own company for 20 or 30 years and then step back all at once and so you know a gradual phase out uh could be an order where you hand off the day-to-day but you're still involved in the big decisions and you're still keeping on top of things enough to know if for example your manager is um mismanaging the company or and i saw this two years ago embezzling uh from the company while europe semi-retired you know different levels of handoff for different people everyone is different um i suggest it as a good incentive to give the manager an ownership interest because you know you don't want a situation where the manager doesn't have skin in the game and then manages the company for two or three years well grows it well and then goes and takes a better offer elsewhere you know give them some interest in the company to keep them invested and really help them grow the company so that you know you profit they profit it's a win-win um janet could also hire a business broker to explore sales options um business brokers a lot of folks don't know they exist but really they're kind of like realtors in a way they um they've handled business sales there's a market uh for you know businesses being sold right now so business broker can help you get evaluation lined up and figure out what your business is worth help you sell it um you know if you're inclined to sell the business it could be to a third party maybe be a broker or it could be to your own employee if they're interested in buying you out there's a number of ways your employee or third party could get financing for it there's a number of sba loans that uh work for buying out of the entirety of a business interest and there's private lender financing you could offer them seller financing where they pay you over time or some combination of the above i literally did a deal not too long ago that involved all of the above it's a little weird mixing sba and private lender financing because of strict sba regulations and um uh lean priorities but um they managed to throw the needle somehow and make that work but there's plenty of options for financing um and again you know grant the owner a small ownership interest and then have the company itself buy her out over time leaving that employee manager as the only remaining owner this is a surprisingly popular option for people who don't you know who want to get paid over a period of time but they don't want to saddle their employee with the immediate tax burden of you know getting the company or some large part as a gift and they don't want the owner to be personally liable if the company goes under um diff you know different sellers have different priorities here some would want the employee to be personally liable some would say no i don't think that's fair to the employee we're going to leave the risk you know i'm going to assume the risk that the business doesn't survive so you know looking at that with a little more depth um she decided to go with that option um give her employee 10 and have the company buy her out over a period of five years how does that work um yannick can either gift or sell the ownership interest to the employee it's important to understand with gifting that there's what's called an annual gift tax exclusion uh it's an amount that you can gift to any person in a year you know below which you would not have to deal with any gift tax on what you're giving them and they wouldn't have to deal with any income tax on what they're giving them uh that amount is fifteen thousand dollars per person per year when last i checked it may have gone up in 2021 i would have to double check it it goes up a little bit each year typically but not by much you can gift amounts larger than that but it comes out of your lifetime combined estate and gift tax exclusion which when last i checked was about 11 million dollars per person thanks to the tax cuts and jobs act so it um i've never seen any of my clients really get up there to where they ever have to pay gift tax on what they're giving it's just you have to look at some gifts in the context of your overall estate because what you don't want is to gift such a large amount that when you pass you have to pay a state tax on the value of your estate because you use your exclusion gifting things again 11 million dollars i've never seen it be an issue for people especially my small business clients but things to be aware of um alternatively janet can sell the ownership interest to the employee one way or the other you gift them the small ownership percentage in this case 10 percent um make sure you have a good operating agreement because that is the governing document by which the company is run by which the owners or members are governed which would include both janet and the new member at that point if it's a corporation instead of an llc you'd want bylaws in the shareholder agreement to accomplish the same thing then janet would enter a buyout agreement with the company itself and this is where things can get really interesting and again customizable in this case janet um said you know pay me over five years straight line you know 60 equal payments um janet retained a security interest in the company's assets for the whole time that the payments were outstanding but janet stepped back from being the mem a member of the company as soon as the um as soon as the buyout agreement was signed so you know the the member became the you know the manager can be only technical owner of the company at that time with janet having a lien on the company but you know because of that and because this was such a hands-off approach for janet she insisted that the you know the remaining employee owner personally guaranteed the obligations of the company to pay janet for her ownership interest so you know that was a level of um security that made janet comfortable some people would insist that the the employee owner themselves buy out the interests uh you know offering a personal guarantee or other collateral some folks insist on less and say you know i don't need a personal guarantee from the employee owner i trust that they're going to run the company well and the company will pay me but they still take a security interest in the company's assets you should have some security interest um to prevent for if nothing else the owner from closing up shops selling the company and then disappearing into the debt of night so you know this is something you want to talk to a good lawyer about typically to make sure that your structure is in a way that works for you as i said they're highly customizable another situation i deal with quite regularly is where the owner you know they want to be bought out by the company but what they do is they put all their ownership interests into escrow and then have the escrow hand off those ownership interests over a period of five years so that the retiring owner stays involved they can vote the shares or units held in escrow during that time and so they're effectively staying on and then they hand off ownership little by little until finally when the last payment has been made they drop down to zero percent ownership interest and then they're out that can get a little complicated but it does have the benefit of letting you gradually phase out and retire in a way that's fair and equitable and make sure that the company and the new owner get what's due to them so again not to harp on this but very flexible again every business owner's needs and priorities are unique to them it's important to have a good and proper succession plan it's also important to understand how to finance some parts of the succession plan like i said the buyout of um a deceased owner or partner or shareholder and a multi-owner company uh it's very important to understand how to finance that next steps i would strongly suggest reaching out to your sbdc liaison and take it from there and figure out what resources are available to you because the sooner you start on this the more orderly the transition if for whatever reason it happens suddenly last thing you want is for everyone else to be scrambling to figure out what to do with this company because you know you put off getting a succession plan in place and then it was too late so i'm gonna go back to the q and a's i've got two questions in here so my first question slide number 21 does an operating agreement have to be administered by a third party i've seen these as fee for service as a micro business single party llc is the way to create this agreement on my own or do i need to hire this out thank you okay great question i'm going to go back to slide 21. so the operating agreement it might help if i clarify what the operating agreement is um the operating agreement it's the governing document of the company itself so if you had three owners of a company for example the operating agreement spells out how they vote um how profits are allocated and distributed between them same with losses you know what the company is there to do what duties of loyalty the owners have to each other and so on um it's very important for a multi-member llc to have an operating agreement um they're not administered by a third party they're just there for the to govern how the members deal with each other how the owners the llc deal with each other and so they have to act in accordance with the operating agreement because it's basically a contract between them as owners of the company and the company itself when an owner doesn't abide by the operating agreement typically you would try and resolve it maybe informally through a mediator but ultimately if you need to through the court or through arbitration a lot of operating agreements have binding arbitration clauses but that's kind of how you deal with them as a micro business single party llc is there a way to create this agreement on my own or do i need to hire this out um what i will tell you is that i have yet to see an operating agreement created by a business owner that offers any kind of real legal protection i will tell you without getting specific because i really can't recommend specific services or providers but there are things out there that let you create a customized operating agreement they're operating agreement generators you can find them online you answer a series of questions and it kind of creates a document for you based on your answers to those questions they're usually pretty affordable nowhere near what you would pay an attorney to draft one themselves you can often find them for under a hundred dollars again reach out to the sbbc they might be able to point you in the direction of one of these products um or you know help you find them or they can point you towards me and i can point you towards them whatever works really i can't plug a specific product but it's important to know that you do have options out there and i'd probably recommend looking at them before trying to create it on your own because you know you know an operating agreement has limited impact when it's a single member llc um maybe it binds your the executor of your estate a little bit um and they could always vote to change it as the only owner it really comes into play more where you've got multiple owners then the next question uh does one set a buyout price by the surviving partner ahead of time or is the value of the company determined afterwards and if the latter how is that calculated agreement between trustee and surviving partner or external business valuation or other method great question fantastic question this is something you can provide in the operating agreement and i highly recommend you do i typically include it in just about all the ones i draft it can be as simple as hiring an outside valuator and if one of the you know if the um one of the parties doesn't like the valuation they can personally commission another evaluation or you could specify evaluation in advance the problem with specifying evaluation in advance is that values change over time so you know if you make a company and you provide a dollar amount in year one and then the company goes gangbusters in year five and grows exponentially um you as you know you probably don't want your estate bound by the valuation in year one because they would be buying the company for pennies on the dollar compared to what it's really worth so my recommendation is almost always to provide evaluation methodology in your operating agreement and provide who's going to make that calculation um typically an accountant a neutral accountant maybe the accountant who's done the company's bookkeeping and taxes again there's a number of ways to customize it but the more you think through this and the better you flesh it out in the operating agreement the better because then you can also you know you can provide for example that you get a revaluation every few years and um adjust your key man policies accordingly which again we'll talk about on the 11th but um these those two things fit together very closely so one more question and how do you determine the value of a business so fun fact as an attorney i really can't provide a specific methodology it's really not in my wheelhouse accountants typically value a business and there's a number of irs approved methodologies there's a handful of them they usually look at the value of the assets of the business so if it's got equipment for what or whatnot you get the real fair market value of that uh you look at uh revenue um you often apply some multiple of revenue or profits uh look at how much it's bringing in in the last three years or you know for the next three years um there's a number of ways of doing it and so that's why it's important like i said when you have a multi-member llc to agree on the methodology in advance because for example if you're using a multiple of revenue you want that agreed upon so that the surviving owners don't say no this valuation is way too high i disagree with how you're doing it but you know great question i would say chat with your accountant to figure out what a good methodology would be there you