According to the latest data from the Bureau of the Census, there are roughly 5.9 million businesses in the U.S., and virtually all of these can be considered small. Only 18,469, or less than one-third of one percent, have more than 500 employees. Even getting to several dozen employees is a feat worthy of recognition, as more than 89 percent of businesses have 20 employees or fewer on their payroll. Despite the diversity in industries, resources, location, and stage of growth, those 89 percent have one thing in common, and that’s “you.” By you, it’s meant an owner who is an indispensable part of the business. What would happen to your business if you suddenly disappeared for a day? How about a month? What if you never came back? Could your business continue where you left off, or would it simply collapse and disappear into the annals of failed ventures? Most owners are so busy trying to grow their businesses that they don’t even consider what would happen if they were to die or become suddenly and permanently incapacitated. Those brave enough to entertain the discussion of their untimely demise do so using the conditional, “if I die,” instead of the certain, “when I die.”
The odds are quite good that as a business owner, most, or all, of your wealth is tied to your business. The odds are also that your family may not have sufficient life insurance to stay protected. If they are counting on your stake in the business to provide for them, that may be unrealistic if the value of the business dies with you. Depending on the study cited, it’s estimated that most small business owners typically have anywhere from 60 to 100 percent of their net worth tied up in their business. The exit strategy is typically a partial or complete sale of the business at some unknown point in the future. So the impact of not planning for your death has significant repercussions. It’s time to protect your business and your family from yourself.
1) Revisit the terms of your personal life insurance policy and make sure it’s up to date. Are the beneficiaries correct? Is the value of the policy sufficient to maintain your family’s current lifestyle until the youngest child graduates college? Are big ticket items like college tuition and mortgage balance payoff included?
2) Shop around. Term insurance rates have become increasingly affordable in recent years. Additionally, more sophisticated insurance products can also serve as tools for more complex estate planning requirements.
3) Have your business purchase a, “key person insurance policy.” These policies are purchased by your company, the premiums are paid for by the company, and the beneficiary is the company. This has several important uses. First, it provides the company with a financial cushion to survive the death of its owner. If there are partners, then it is very important to also have a “buy-sell” agreement. This agreement states that upon the death of a partner, the business has the right to buy out the deceased partner’s equity. The proceeds of the policy are used to fund the acquisition of the ownership stake.
4) Prepare a secure file offsite with all of your passwords, account information, and file access information. With most key information locked away behind password protected software, it’s critical that someone knows how to access your email and file directory. You can keep this information with your attorney.
5) Have a contingency plan in place for your operations. Spend a day every six months making sure it is up to date and that key people are aware of what should take place when you die or are incapacitated.
6) Delegate! Stop being the only key person in your company. Give others a sense of ownership by making them responsible for important areas of your company’s operations. This is good advice, even if you don’t go anywhere for a long time.
The preceding was adapted from a piece written by Mike Periu, principal of EcoFin Media, which empowers individuals to make sound financial decisions for themselves. He can be reached at ecofinmedia.com.