Although when you first start a business this may be the furthest thing from your mind, but what would happen if you suddenly died? Or even if you were injured and you were no longer able to work your business?
What would happen to your family and their source of income?
Who would step in to run your business?
Would your heirs be able to sell your business and for what it is worth?
Now of course there is the issue of having insurance but beyond that do you have any plan in place for what could and would happen to your business?
What you need is called a Business Continuity Plan, which is not the same as a Succession Plan that I will cover in another post.
- It creates a guaranteed market and price for the business and its interests.
- It allows the business to carry on as normal without stoppage due to your death or debilitating illness.
- It allows the business to carry on as normal without interference from heirs, whether they are included or not in the plan.
- It can provide liquidity for the estate of a deceased owner allowing the business to be turned into cash for the heirs.
- It can provide an established value of the business for estate tax purposes.
There can be many different buy-sell agreements that can be set up according to you, your family, the business and employees needs.
There is the Cross Purchase: When a business is already owned by more than one party or partner where they have agreed that the surviving owner or owners are obligated to buy the interest of the deceased, and the estate of the deceased is obligated to sell at a previously agreed to price or by a continued payout to the estate.
An Entity Sale: This binds the business itself to buy the interest of the deceased owner, and the estate is obligated to sell, when the business is a corporation. This is sometimes referred to as a stock redemption agreement.
If the business is a sole ownership, you could plan to have an employee purchase. Where you may have one or more employees that have been instrumental in running the business and you as the owner would like to see the business to continue under their ownership. This agreement between the former employees and the deceased estate can be an outright purchase for a set price, or a gradual buy out allowing the employees to buy over time and the estate to continue to receive an agreed upon income until finalization of the sale or end of the terms of the agreement.
You can also have a Wait and See agreement. This type of agreement allows the flexibility in that the final decision to buy and sell is not decided until after the owner’s death but the details of running the business until that time is spelled out in the agreement. This way the person in charge of the estate would oversee the terms of the agreement and the business could continue to function as normal allowing the business to stay a viable investment.
With a sudden death the hardest part maybe for the parties to find the funds needed to complete the purchase detailed in the plan. Here are some common funding sources and the unique challenges, though having enough life insurance is always the best solution.
Personal Funds of the Owners: Most business owners and partners keep the majority of their money already invested in the business so they may not have large sums of liquid assets available for the total purchase price.
Borrowed Funds: Many times banks may not be willing to lend money for a business that has lost the owner or a partner or the cost of such a loan may have a rate of interest that may be excessive that will be a burden to the business. Or the business may have already reached it borrowing limit.
Installment Payments: The heirs may not be able to get the agreed to sums from the business in payments and there is no guarantee to receive future payments if the business fails.
Life or Disability Insurance: Can be set up ahead of time to pay for the estimated costs of which ever plan you have chosen to use.
- Insurance can be purchased separately from any another policy.
- The policy can be purchased by the business.
- The premiums are over time a small fraction of the benefits to be paid out.
- The benefits are available right away after death or as soon as the policy allows with a disability.
- Death benefits are generally federal income tax-free.
Do not leave the burden of running your business or the uncertainty of not having continued income for your family to deal with. Start now while you are able.