Being a small business person myself I know that there are plenty of opportunities to bust your budget if you take everyone’s advice, get all the best bells and whistles and make your business 99.99% bombproof. It’s funny to see success draw the vultures in.
My website, this blog, used to have quite a bit of traffic but needed an SEO guru to bring the attention it needed to actually turn visits into customers calling. My blog hasn’t changed since I started several years ago, but in the last year it has started to bear fruit, amazing just a month after I asked Chris Sharp to start working on it. Along with the changes and the successful placement he has brought me, I am now inundated with email from people that claim they can get me first page Google rankings.
But let’s talk about your business and what happens to the value of your business if you die unexpectedly. It really doesn’t matter if you’re a sole proprietor, a partner or a key person in a business, your death, unplanned for, can be devastating for your family, the business you’ve built and all the people that depend on that business. Whether you take action or not, it is worthy of some thought. What happens if I, or some key person in the company, fails to wake up for work tomorrow?
For the sole proprietor it may or may not be a matter of how to pass the business on. Certainly if you do all of the work and no one else is interested in taking that over, your business life insurance position is only slightly different than that of someone who works as an employee. While the bulk of your life insurance need is income replacement to your family, there are also the costs of shutting down a business. Keep in mind that most sole proprietorships don’t have any sale value. I remember during the years I spent as a cabinet maker, dying during a job would have left 1. A job that would need to be finished by someone else, a cost to the customer and 2. Materials that might need to be paid plus 3. Any outstanding bills of the business. Since I lived pretty much job to job (paycheck to paycheck), dying during an unfinished job would mean no money to pay current bills.
But my business scenario has changed and now I have an admin assistant/office manager/aspiring purchaser of my business. As that plan comes together but before we do anything like a partnership, my death, without some key person life insurance policy on me, would make it impossible for my future purchaser to ever realize that goal. I have plenty of life insurance to take care of my family and any bills that might be due at my death. But if my future partner carried a life insurance policy on me as a key person in the business, then the business could survive the hit that it would take while the new owner turned things around and got the business back to normal. Unlike the sole proprietor any life insurance applications in progress would be finished and any new business coming in would be taken care of. With the business insurance proceeds from me it would allow my successor to move ahead with my wife as a silent partner.
When we become partners in the business which is probably some years away, then we would carry business buy/sell life insurance on each other. She would carry a policy on me that would allow her to buy my wife’s portion of the business and likewise, I would carry a policy on her that would allow me to buy her husband’s legal portion of the business. In that scenario my wife would no longer be a partner of the business having been bought out. At least that’s the plan at this moment. I want Hinerman Group to survive me and continue to help people way beyond my time here on earth.
For larger businesses there are versions of these same themes that truly need consideration. It may be that a key person is not the owner of the company. Let’s say that my company has grown substantially and that the succession of my business from an ownership standpoint is not in question. But my SEO guru mentioned above doesn’t have a succession plan in his business. While not an employee, Chris is and I suspect always will be a key service provider in the business. If he died suddenly and there wasn’t a succession plan in his business that would mean two things. 1. I didn’t do my job in letting him know that I needed a policy on his life for the health of my business and 2. My business would go through some changes that would cost money possibly in lost revenue, but also in acquiring a replacement and fully integrating the new person or company in to how we were doing things.
Perhaps prior to a partnership, as the business grew and my partner to be became more and more vested in the business I would reward that with stock, part ownership, in the business. While not yet partners in the sense that we have created a new business shell that change the business from the S Corp it is today to some form of legal and binding partnership, we would want to be prepared for succession. In this case it would be a life insurance stock repurchase agreement. Much like a buy/sell it would allow each of us to buy out the other family’s portion of the business.
With the international nature of so many businesses these days, the same considerations come in to play. Hinerman Group has the ability to put life insurance in force on multi national business owners.
Bottom line. Too many business people today only consider the impact on their own family if premature death impacts the business. For the health of your company and all that depend on it, business life insurance succession planning is a worthwhile exercise. If you have any questions or want to see what it would take to protect your business succession, call or email me directly. Let’s talk.