When it comes to business continuation planning, the phrase “you can either fail to plan or plan to fail” certainly applies. As a business owner, you may have created a formal business plan or have done no planning at all. But if you fail to plan your own exit strategy, forces beyond your control may create a plan for you.
Business continuation planning is a systematic plan to either continue or dispose of your business interest in the event of your retirement, disability or death.
Many business owners hold one of three common misconceptions:
- My family can run my business.
In many instances, the family may not be capable nor interested in running the business. No one in your family may be capable of completing your duties, and it may take substantial time and money to hire a replacement. Without your expertise, banks may be less likely to lend money to keep the business afloat.
- One of my employees can run my business.
Possibly, but wouldn’t they want to be compensated for the additional duties of running a business? How do they pay the surviving family members for their share of the inherited business? If the employee does a poor job, the value for the heirs decreases.
- A competitor will buy my business.
This could happen, however, it is more likely that a competitor will look to take customers from your business or pay a “fire sale” price for the business as a whole.
There are several types of life insurance that can help.
KEY PERSON INSURANCE
Key person life insurance is owned by the business on the life of a key employee, purchased to help reimburse an employer for the economic loss caused by the death of the employee. As such, key person life insurance is not just a specific type of life insurance policy, but is an effective way for a business entity to use life insurance. With appropriate ownership and beneficiary designations, the policy can be used to fund business needs.
A buy-sell agreement funded with life insurance provides that someone (for example, the business entity, the surviving owners or a key employee) will purchase a deceased owner’s interest at an agreed-upon price; and the deceased owner’s estate is obligated to sell the interest at that price. Life insurance provides the immediate funds necessary to complete the transaction.
PERSONAL LIFE INSURANCE
Personally owned life insurance provides income replacement for your family to meet current needs, reducing the immediate pressure at the time of your death.
Life insurance can play an integral part of your business continuation plan and protect your, your heirs’ and your employees’ interests. Speak with your agent and your attorney to make sure you have appropriate measures in place.
Find more information in our previous blog, What to do with my business when I want to retire.