Most business owners depend on their business to provide current income, with the objective of using the future sale proceeds from the business to meet retirement income needs, or to provide family survivor income needs. Some business owners may also see their business continuing in the hands of family members who will continue its successful operation, extending the financial benefits far into the future. However, many business owners never take the time to plan how this will actually happen; discovering too late, for example, following the untimely death of a co-owner, that the time for planning has gone by.
Family businesses who make it to the second, third and even fourth generations have one thing in common; owners who understand the planning opportunities available to them and the importance of developing and implementing a long-range plan. These plans include protecting against the unexpected death of an owner or key employee; motivating and rewarding key people with tangible benefits and incentives; using business dollars to fund retirement plans, and transitioning the business to a successor owner.
One of the ways a business owner can protect his or her business if an essential employee dies unexpectedly, is through the purchase of business-owned life insurance. With insurance coverage in place, the business will have the funds it needs to replace essential skills or expertise. Having life insurance in place on key people may also improve the creditworthiness of the business; creditors may be less likely to call loans and may be more likely to extend credit to a business that has a plan in place in the event of the death of a key person.
Keeping and motivating key employees can be as important to the ongoing success of a business as protecting the business in the event of their death. Certain types of benefits can be offered to select key people on a “discriminatory” basis – that is, a business owner has a great deal of flexibility in terms of who is rewarded and by how much. Depending on the benefit, the business may get an offsetting tax deduction or build an asset that can be tapped into for cash needs.
As some point, most business owners start to think less about guiding their business into the future and more about transitioning out of its day to day operation. This is the time to plan an exit strategy that allows an owner to transfer any personal wealth accumulated inside of the business to him or herself, without jeopardizing the business’ ongoing financial health. Without such an exit strategy, an unexpected death could leave an owner or their family in a disadvantaged selling and/or bargaining position. Life insurance can address this important need. Because of its income tax free death benefit, life insurance is often used to fund a buy-sell agreement that can help ensure the continuation of the business beyond the voluntary or involuntary departure of the owner. This type of agreement is a legally binding document that the business owner can enter into now that sets out the terms and conditions of the sale of his or her business interest at some point in the future. These terms and conditions include who will purchase the business and for how much, when the sale will take place, and how the purchase price will be paid.
Planning for the growth and success of a business is not something you do only once. It’s something you do on an ongoing basis. As your business moves through the various stages, the strategies you implement in one stage can help build the foundation for future stages, as you build a strong financial future.
The views and information contained herein have been prepared independently of the presenting Representative and are presented for informational purposes only.