This article is from friend and attorney, Robert Newton, who’s website, Bizbrook.com aims to guide you in your journey from employee, to self-employed, to employer. Check out his recent series, 10 Steps to Starting a Business.
It’s a daunting question. Each of us possesses a strong aversion to discuss our own mortality, much less deal with it.
But, as Mr. DeVoe and Mr. Franklin intelligently reasoned, nothing is more certain than our death (and taxes). In business, the survival of your business upon your death is called a “succession plan.”
If you have not truly reflected the state of your business after your death, you should. It is the most important thing you can do for your family.
Further, a succession plan is just as important, if not more so, when a business has multiple owners. Here are some key elements to a solid business succession plan:
Life Insurance (Key-Man Insurance)
Life insurance is a critical asset of any business. When a business obtains life insurance on a key person, it is called key-man insurance. And, it can be utilized in many different manners.
For sole-owner businesses, life insurance (which does not necessarily have to be “key-man insurance”) may be maintained to insure the spouse does not have to work after the key person’s death. Or, enough insurance may be purchased for the spouse to quit his/her job and work for the business.
Alternatively, the spouse may continue his/her present employment and use the insurance proceeds to hire another key person to continue running the business.
For companies that have multiple owners, the life insurance proceeds can be used to hire another person or pay debt that may be in default because of the other owner’s death. Life insurance could also be used to buyout the deceased owner’s spouse or estate (either due to a preexisting agreement or otherwise).
A buy/sell agreement is a predetermined contract that provides either (i) a mandate or (ii) an option for one owner to buyout another owner at a predetermined price or methodology. Buy/sell agreements are oftentimes placed in the organizational documents of the company, such as a partnership agreement or operating agreement.
Buy/sell agreements may be based on a stated price, a stated formula, or an agreement to hire an appraiser to determine the value of the ownership position at the time of death. When combined with life insurance to the benefit of the surviving owner, buy/sell agreements can be an incredibly useful tool.
Wills and Trusts
Another useful tool in your succession plan would be your last will and testament. When drafting your will, don’t forget about the ownership of your company. If you desire your business ownership to be left specifically to someone, then you better mention it. Otherwise, you may leave a really big mess that your survivors could spend years trying to clean.
Sale to a Third Party
Some small business owners will die without a survivor that has the desire or ability to operate the business. Try to find someone interested in buying your business in case you die. Determine his/her wherewithal to continue the business upon your death. In addition, look for business brokers that specialize in your specific business.
Be sure to obtain enough life insurance for your business to survive twelve to twenty-four months so that your survivors have time to sell it. Most importantly, keep your spouse informed of these matters to insure a clean transition.
I’d love to hear whether you have a succession plan and what it is.
Photo by djLicious