Safeguarding Your Business
Safeguarding your Business
Business Continuation Planning
According to a recent LIMRA Small Business Owner Report, 65% of closely held businesses do not have proper exit plans in place and 60% of closely held businesses in the US may not be properly valued.
If an owner or partner in a business exits the business unexpectedly due to a death or disability it creates a hardship for the surviving business owners and the deceased partner’s family. The business may not continue unless there is written contingency plan called a Buy-Sell agreement.
A Buy-Sell agreement is a legally binding contract that provides for the sale of a business ownership interest upon a triggering event such as death, disability or retirement. With a properly funded Buy-Sell agreement the surviving partners have opportunity and funds to purchase the deceased owner’s interest based on a predetermined amount; and the deceased owner’s heirs receive a fair market value for their business interest paid in cash.
The best way to complete the buy-sell transaction in a timely manner is with cash. It is what the decedent’s family wants and what the surviving partners need. However, the surviving owners may not have sufficient cash on hand or it is tied up in the business. The most economical way to provide a specific amount of money at an unspecific time in future is with life and disability insurance.
Protecting Key Personnel
Many businesses have a key person who is responsible for the majority of profits, or has a unique and hard to replace skill set such as Intellectual Property that is vital to the organization. An employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company. The employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained) which the employer is likely to suffer in the event of the loss of a key person due to death or disability.
Retaining Key Personnel
Retaining the people who are extremely valuable to your company and its success is also a concern of business owners. They do not want to lose their employee to another opportunity or the competition, so they make it worthwhile for that person to stay by offering them something of value. A life insurance policy with living benefits can be a great tool for that. As long as the employee stays with the company the employer provides the money to pay the policy premium each year through an Executive Bonus. The employee owns the contract, and if he dies, his family will receive income from the policy. The policy’s cash value can provide supplemental income in retirement or pay for long-term care expenses if needed.
Just as you insure your equipment and business property, consider insuring against the loss of your key personnel.