Prince’s Death a Reminder in Business Succession Planning

By now, it is common knowledge that we have lost Prince, one of the greatest artists of our time. Though he is gone, his legacy will live on in his music, movies, and various other distributions of his image and art. Unfortunately, Prince had no will. According to various estimates, Prince’s net worth at the time of his death was roughly 300 million with an additional 100 million expected in the next five years alone from fans that will continue to purchase the late singer’s songs and other memorabilia in his honor. And if this is indeed true, this may be one of the worst business succession failures in recent memory in the music industry. It just takes a second to recognize that Prince’s impact on society was far greater than just his music. There were literally hundreds of thousands of tweets, articles and blog posts reflecting the impact Prince made upon them. In short, Prince was an iconic brand that conducted business at his compound known as Paisley Park Studios just outside of Minneapolis. Without having a will that established who will control his iconic brand, Prince essentially was running a multi-million dollar business without succession planning.

So why then do you want to have continuity succession planning in place? There are many considerations to take into account and in no particular order they are: mortality, tax planning, life changes or events to just name a few.

Mortality. The only certainty in this world is that no one is getting out of here alive. What will happen to your business when you are gone? This can be a very emotional question and likely the biggest reason why people do not have estate plans. People don’t like to talk or even think about their own death. However, if you don’t deal with it, your survivors under the laws of intestate succession will be the ones running your business. Think about how much effort you placed into getting your business going. How hard you worked to create that brand and what it stands for. Do you want your brothers and sisters or children running the show? What about your business partners? The people with whom you share your personal and professional life may not be suited or capable of successfully working together and picking up the pieces after you did not plan carefully enough. Truth be told, if you have partners (fellow shareholders), then they are also partly to blame here. While they are not responsible for your estate plan, they are equally responsible for not having a business succession agreement in place. More on this agreement later.

Life Events. While there are many possible scenarios, the most common one is marriage. What happens when your business partner gets married? Worse yet, what will happen when your married business partner dies and his wife inherits his shares in the business under the will? Without proper business succession planning, you now have a new business partner! Another common scenario is the family business. It is a common saying that the first generation makes the business while the 2^nd generation works just a little bit less and the third generation destroys the business. A business succession agreement or plan addresses these issues.

Taxes. Simply stated, a business succession plan will drastically reduce the taxes levied upon your death. You spend your entire life creating your business and providing for your family, why wouldn’t you want a system in place to reduce the burden? Taxes when you pass at the highest marginal rate currently sit at 40%.

Business Succession Agreement. The best argument to be made on why you need a business succession agreement is to maintain control over the outcome. If all stakeholders are involved in the process and understand what their roles are and will be, the process can hopefully be smoother than it would be without a plan in place. The continued success of the business is the ultimate goal and a good succession plan will meet the objectives of not only the business owner but all other stakeholders as well. For it to work, communication is key and everyone has to understand their assigned roles in the transition process. Without communication and understanding, chaos ensues. Ultimately the business suffers and the result is a war between various shareholder factions.

Shareholder Divorce. Imagine this scenario. Without a succession plan, the next generation of shareholders believes their contribution to the company is worth “X” but their sibling believes it is worth “Y”. Worse yet is when one brother or sister has been working at the company business for years and then his or her sister comes in and immediately wants to implement changes but has never worked a day at the company in his or her life. Now imagine the siblings are related through a blended family situation, perhaps half or step siblings? Even the best relationships have the possibility to breed hatred after a death in the struggle for money and family identity. All of this can lead to rash decisions and expensive litigation where accusations of “stealing”, “wasting” or “fraud” are lobbed back and forth.

This is all to say that a business succession agreement lets everyone know what is expected of them and what they are entitled to if everyone does their job properly. It allows your business and your family to move on as peacefully as possible after your passing. If Prince truly does not have a will like his sister reports, there will be rough waters ahead as people jockey for control of his music empire and his brand will suffer. This is deeply troubling as his brand is part of his legacy.

Next week, we’ll talk about the various forms a business succession plan can take. From a few paragraphs in a shareholder agreement to a more elaborate approach, there is no one size fits all answer.

If you have any questions about business succession planning or shareholder litigation, please feel free to call us at Danziger Shapiro to discuss this affecting your business.

This entry is presented for informational purposes only and is not intended to constitute legal advice.