How Business Succession Planning Can Prepare Your Company for the Worst
All employers should realize that business owners and corporate partners are constantly faced with a myriad of risks that could affect the viability of their business. Market competition, shifting demographics, product obsolescence / pipeline, or even the recent credit and liquidity crunch are just a few that come to mind. However, one issue that continues to stand out is lack of business succession planning, or how the company would survive if something happened to the principal owner or partner? To emphasize the point, let’s look at several common myths.
Myth #1: If our owner dies, the owner’s spouse or remaining partners can run the business.
In many instances, the spouse and or family neither wants to, nor is capable of, running the company. In addition, many companies (especially small businesses) are often dependent on the marketing contacts, or technical skill of the owner or a specific partner. If this goes away, the business may fail.
Myth #2: If our owner dies, the owner’s family or partners can sell to a competitor.
They certainly can sell the company, but the reality is it may not be economically advantageous to do so. Existing market conditions, competitive forces or a financial liquidity crisis might force the sale of the business at a price far below market value.
Myth #3: The death of our owner or any of the partners would not impact the business financially.
Business owners or partners in closely held corporations often make specific contributions to the business or bring very specific skill sets, which may not be readily replaceable. If a partner or owner dies, the survivors might have a hard time keeping the business afloat while finding a replacement and keeping business away from competitors. In addition, the surviving spouse may choose to become involved in the business.
Myth #4: If something happens to our owner, the key employees can run the company.
That may be the case, but most likely at an increase in compensation commensurate with the increased demands on the key employees. It could also be that the key employees might not want to run the company when the time comes.
Business succession planning can help to minimize the risks to the business associated with an owner’s or partner’s premature passing. Properly funded “buy-sell” agreements are a great way to provide the needed liquidity to a company. There are several different ways to fund these agreements, (bank loans, sinking funds, etc.); however, one option (and usually the least expensive) is the use of life insurance.
If the owner or partner is a sole proprietor, he or she can own life insurance equal to the value of the business to give the survivors proceeds even if they cannot sell the business. If the entity is a partnership or corporation, they can use life insurance to fund a “buy-sell” agreement as a cross-purchase or a stock redemption plan to give the surviving partners the ability to buy out the surviving spouse at an agreed upon price. Finally, in the event of the death of a key employee, “key person” insurance can give partners flexibility to hire a replacement on their timeline, as well as help to defray expenses during the transition.
If you would like to learn more about business succession planning and how it could help insure the survival of your business, please click on the links below, or contact our Retirement & Financial Services division at 919-913-0235.
Getting Your Buy-Sell Ducks in a Row
Structuring Corporate Buy-Sell Agreements
Buy-Sell Agreements for Your Business
Why You Need a Buy-Sell Agreement
Questions or comments about this article? Email us at comments@hcwbenefits.com.
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October 12, 2007
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