Planning for a smooth continuation of your business after the unexpected loss of key people is crucial. As a business owner can you answer the following questions:
- What happens to my business if I die unexpectedly? What happens to my business if my partner or partners die unexpectedly?
- Do I want to go into business with my deceased partners heirs? Does my partner want to go into business with my heirs?
- Do I have the financial resources to completely buy out my partners' share of the business? Does he/she have the resources to buy out my share?
If you have a major financial interest in a company that could be jeopardized by the death or disability of an owner, partner or key person, then you need a Business Continuity Plan.
An effective Business Continuity Plan is one that:
- Offsets the losses generated by the absence of a key person
- Allows the business to continue and remain profitable
- Does not impose a financial burden on the business
- Ensures that control of the business passes to the proper person or persons
- Provides a fair and adequate amount for the interests of the deceased owner's heirs
- Prevents legal battles
One in three closely held businesses does not have a Business Continuity Plan in place. Of the businesses that do have a plan in place, 80% finance the continuity with life insurance. The most common form of Business Continuity Plan is a Buy/Sell Agreement - which usually come in one of two forms:
- Cross Purchase Plan - A document that allows a company's partners or other shareholders to purchase the interest or shares of a partner who is deceased, incapacitated or retiring. The document outlines how the shares can be divided or purchased by the remaining partners, such as a proportional distribution according to each partner's stake in the company. Each owner pays the premiums personally.
- Repurchase (Stock Redemption) Plan - Often used when the Business Continuity Plan involves employees purchasing an existing owners shares (i.e. a management buyout). The owner enters into an agreement with the business for the sale of his/her respective interests in the business. The business purchases separate life insurance contracts on the life of the owners or owners. The business pays the premiums and is the beneficiary. If an owner dies, his or her share of the company will pass to the heirs of his or her estate. The business then uses the proceeds from the life insurance policy to purchase the interest from the estate.
These agreements can be complicated and are usually drawn up by an attorney or trustee. We have helped structure the life insurance component of this type of agreement for many of our clients. Having a Business Continuity Plan in place is not only important to you and your business partners, but to your bank and surety as well.
Let us know how we can help!