Protecting Your Arizona Business: Transitioning Without Chaos
00:00:00
Francisco Sirvent: Hello, hello. We are here to protect your business in Arizona. We actually work in the whole United States, but our focus is in Arizona. There are a lot of small businesses out there just hustling and making a difference. When they get to the size where they have usually at least five employees and they’re doing around a million or more in gross revenue, it starts to look like something that can be valuable on its own.
If you’re the owner and you’re still grinding away and hustling to make it work—or if you’re starting to see your business operate by itself some—you’re wondering, “What happens if something happens to me?” If something happens to you, that’s where it gets scary, because do you really have a plan in place, or is it just set up for absolute chaos when an emergency happens? Welcome to today’s webinar on how to transfer an operating business without chaos: an Arizona owner’s guide to protecting your legacy and your family.
00:12:28
Francisco Sirvent: These are webinars we do all the time and I welcome you to it. If you’re looking for other topics, I invite you to go to keystoneawfirm.com/events and you can register for those right there. If you’re looking for past topics, you can go to our YouTube channel and see the recordings at youtube.com/keystonelawfirm.
Before I jump into the content, we’ve got to do the legal notices. This is not legal advice for anybody’s specific situation. Even though this is stuff we know how to do and we’re happy to share our information and give you all the best tips we can think of, don’t take action based on what you learn here today, okay? Every single family we sit down with has little differences that can make a big difference for you. This is just educational information of a general nature.
Who Takes the Wheel on Tuesday?
00:13:35
Francisco Sirvent: The real question for a small business owner is: if you don’t show up on Monday because of some emergency, who takes the wheel on Tuesday? What happens? Do you know what’s going to happen? Do you already have that in place?
What I hope you walk away with today is at least a couple of nuggets of something new. My second goal is that if you get to the end of this and you think, “Oh my gosh, I need to do something about this,” you get a chance to see how we work at Keystone. It gives you a taste of what we do, how we do it, and what some of the tools are that we might use. It gives you a chance to say, “You know what? They seem like somebody I might want to work with.” I don’t want anybody who needs this help to not know where to go.
00:14:45
Francisco Sirvent: If that’s not you, that’s perfectly fine. We’ll be here for about 30 to 45 minutes, and I hope you walk away with those goals. I work with a lot of business owner friends and it’s easy to think, “My business is my plan. It’s there. I already know who’s going to take over.” But without the actual legal structure, tax structure, and operational documents in place, it becomes a big liability for an owner to pass away or have a medical emergency.
We’ve been called in multiple times after someone has passed away unexpectedly and it’s just chaos. Nobody knows who’s really in charge. The operations manager or the COO might know what to do to keep things going, but those big decisions that have always been made by the owner? They’re not there anymore.
The reality is about 70% of businesses fail when the founder is gone. That’s a pretty consistent statistic decade over decade. It’s frustrating to work your butt off to grow a business, and then three out of four times, it doesn’t make that transition. All the employees float away, the customers move to other businesses, and your family is left with a shell. That is a liability that has to be cleaned up. It doesn’t have to be that way; it can be an asset that is passed on to keep going.
The Procrastination Trap and Personal Estate Planning
00:17:05
Francisco Sirvent: The first big thing I want to talk about is this “procrastination trap.” It’s easy to be overwhelmed. How am I going to eat this elephant? I’m already overwhelmed running my business day-to-day.
The first step in any business owner’s plan is to think about your own personal estate plan and how the business fits into that. This identifies who is going to be in charge of your whole estate, which your business is a part of. At least then we’ve got your best thinking on who might be able to run that business or who would know who to appoint to be in charge.
00:18:26
Francisco Sirvent: When you don’t have your basic estate plan in place—wills, revocable living trusts, power of attorney—a “forced takeover” gets triggered if there’s a sudden illness like a stroke or any medical emergency. That trigger is going to force things into Arizona’s default laws. That’s where the probate court takes over.
The probate court is going to ask if there is somebody designated in legal documents to manage the business and your financial affairs. If there is nobody designated, the court has to appoint someone. Usually, it’s whoever steps up in your family. If nobody comes forward, a judge might pick a completely unrelated professional who doesn’t know your business or your heirs.
What are they going to do? Often, they just figure out how to wind the business down to minimize liability to your estate. If your business has been a significant source of income for your family, is that really what’s best?
00:20:47
Francisco Sirvent: In Arizona, without a plan, you’re looking at what’s called a conservatorship to manage your equity ownership. That conservator has to report to the court, justify decisions, and maybe post a bond for the value of the business. You’re looking at two to three attorneys required by the court, all getting paid out of your pocket at $300 to $600 an hour.
Talk about slow decision-making. If your business is affected by that, it’s going to hurt even more. After somebody passes away, you’re looking at typical probate. It’s not easy to operate an ongoing business through probate because of timelines and deadlines. Slow decision-making can kill a business.
So, step one is getting your personal estate plan in place with specific sections that address the business—who is in control operationally and where the equity goes.
Equalizing the Inheritance: The Operations vs. Profit Conflict
00:23:17
Francisco Sirvent: Step two is thinking about how the business is going to be distributed. Many owners think, “I’ll just leave it to my spouse and then to my kids equally.” That is fine if all you have is cash and real estate. But when you have a business, your heirs will look at that from very different perspectives.
Often, one heir has been working in the business and is being groomed to take over. They want to grow the business and reinvest. The heirs who are not involved want profit, distributions, and cash in their pocket. They are at direct odds with each other.
00:26:50
Francisco Sirvent: They all get along until the business shows a profit of a few hundred thousand or a couple million dollars. The one in operations wants to reinvest; the others want their money. If the two non-operational heirs can outvote the one in operations, it causes massive disagreements.
What you want to do is figure out how to equalize what they get, even if it’s not from the same bucket. Can the business go to one child while the others share in the equivalent value of cash, real estate, or life insurance? This allows the one who is grinding away to operate the business as they see fit.
This requires the business to be appraised. It might also require a buyout option where the operating heir pays off the other heirs over time via a secured promissory note, usually funded by the business’s cash flow.
The Tax Trap: C Corps, S Corps, and the 5-Year Rule
00:29:21
Francisco Sirvent: The third secret is the tax situation. Many older businesses were set up as C corps because that was traditional. The challenge with a C corp is the double tax that happens during a transfer. There is taxation at the corporate level, and then individual taxation when profit is distributed to owners. That can eat away a ton of the retirement bucket.
To avoid this, many clients convert to an S corp, which avoids corporate-level tax and passes income through to the individual. But here is the trick: you can’t do it at the last minute. The IRS tax code says the conversion must be done at least five years before the transfer. If you do it within that window, the IRS unwinds the S corp election and you end up under C corp rules anyway. You have to plan ahead.
00:32:52
Francisco Sirvent: We also see owners who want to sell their business to their children at a “family discount.” The IRS has very specific technical rules for family transfers. They can force the business to be appraised at fair market value and tax you on that number, not the discounted price you agreed on.
The only way to justify your value is a third-party independent appraisal. If you want to sell a $5 million business for $2 million, you need to strategically use your lifetime gift exemption to document that $3 million difference as a gift. Doing this correctly ensures you pass an audit and don’t trigger a massive tax bill for your spouse or child.
The Unintentional Partner and Buy-Sell Agreements
00:35:40
Francisco Sirvent: The fourth secret is the “unintentional partner.” If you have a business partner, what happens if something happens to them? If they pass away, go through a divorce, or have a medical emergency, who is your new partner? Is it their ex-spouse’s divorce attorney? Is it a random fiduciary appointed by a judge?
Suddenly, you’re in partnership with an outsider who wants to maximize cash distributions and doesn’t understand your informal decision-making process.
00:39:09
Francisco Sirvent: Your partner needs an estate plan, but you also need a Buy-Sell Agreement. This is a separate contract that says if something happens to one of us—disability, death, or divorce (the three Ds)—that equity is immediately offered for sale to the remaining owners at market price.
This ensures operational control stays with those who know the business. To fund this, owners often use secured promissory notes or SBA loans. A Buy-Sell Agreement is powerful for keeping emergencies or messy divorces from destroying the business.
The “Chaos Check” and Next Steps
00:41:35
Francisco Sirvent: Those are the four big things. Here is a quick Chaos Check:
Are your corporate minutes blank or outdated?
Does the cash register stop when you stop?
Is all the institutional knowledge in your head, or is it documented?
You need a blueprint for emergencies: who is in charge, where the contracts are, and internal governing instructions.
If you are a small business owner in Arizona with five or more employees and over a million in revenue, these are the steps to ensure your business can be passed on. If you’re thinking, “I really should be looking into this,” I invite you to schedule a quick 15-minute Business Protection Call with me. Alexis is posting the link in the chat. There’s no cost—we’ll just talk about your business and see if we can help.
Thanks for coming today. This will be up on YouTube in a week or two. Have a great day, everyone!
