Most entrepreneurs are a rare breed, full of optimism and confidence. But the same optimism it takes to run a company is the same certainty that makes them feel invincible. Every economic downturn is the last, every prospect is the next big sale, and every good leader retires happily with their family.
Unfortunately, none of us are invincible. We recommend you talk to your attorney about wills and trusts to protect your family. And consider these practical steps to minimize the effects of death or illness on your business:
Death in a Partnership: Updating Your Buy-Sell Agreement
If you have a partner, periodically update your buy-sell agreement to make sure it reflects your current business situation. We’ve seen business owners establish these agreements when they start or purchase a company, only to let them sit for fifteen years unchanged as partners come and go and business value increases.
Many business partners will fund their buy-sell agreements with life insurance. This creates a sum of money that can be used to buy out your percentage of ownership interest if you die. Your family receives your share of the business value without threatening the company’s continuity. Get an updated estimate of value every two to three years, then adjust your agreement and the amount of life insurance accordingly. If you don’t, both your family and your business could be mired in litigation and financial difficulty.
Let’s assume everyone agrees that the fair market value is $10 million. But the last time you updated your life insurance, the company was worth just $4 million. Also assume the two partners were 50/50 and each had life insurance to cover their half of the business value. That means your surviving partner only has $2 million in life insurance to pay your estate, leaving a $3 million gap. That’s a significant liability for your company to bear, and paying down that balance will mean forgoing growth and reinvestment for years to come which could negatively affect the company and the chances of your estate getting paid.
Death of a Sole Owner: Life Insurance and Succession Planning
Even if you don’t have a partner, life insurance can still be a good tool to protect your business. This cash can sustain your family for a while, buying them time to sell the business or establish new leadership. It can also provide the business with the extra equity necessary to hire a transitional CEO or increase management salaries after you’re gone.
Beyond life insurance, have a plan in place to transition the business in the event of an untimely death. We’ve seen firsthand the effects of failing to plan ahead while sitting down with a red-eyed widow in her husband’s office; stacks of papers two feet high all around her. She was trying her best to keep the business together and felt totally overwhelmed by the task.
Building a Strong Management Team
Another practical step you can take to protect your business is to build up a management team or group of key employees. The more you can train key employees to take over your responsibilities, the better off your company will be in the event of your death, illness, or even a business sale.
Communication and Planning are Key
Whether your plan involves family members or key employees, sit down and talk it through with everyone involved, including your spouse and attorney. There’s nothing worse than a loved one dying before they should, except the tragedy that is compounded by the stress and conflict that results when your survivors don’t have a clear plan for moving ahead.
A few meetings and a little legal and tax guidance can go a long way toward protecting your family and your business. Put your optimism aside for a moment and plan for the worst. Otherwise, your family might lose you and then suffer the additional blow of watching your company crumble as well.
