Planning is Key When Dealing with Business Transition Continuity Issues and Solutions
Are you prepared if something happens to you or a co-business owner, or a key member of management? If the answer is no, it is time to get serious about business transition planning. After all, successfully protecting your business and long-term family wealth starts with a solid business transition plan.
What if a privately owned company loses an owner?
If there is no formal agreement between shareholders to redeem stock in the event of death or disability, the remaining owners will discover a new voice in the company’s decision process, which would include the spouse or heirs of the deceased or disabled owner. If the new partner has no expertise or interest in common with the other owners, the negative impact on the company could be detrimental and even fatal to its success.
On the other side of the coin is the financial threat to the heirs of a deceased or disabled owner, who in most cases, cannot sell the stock they inherit and become dependent on the success of a company in which they have minimal control.
With a Buy-Sell Agreement in place the conditions for repurchasing stock from an owner are set, as well as the terms of the sale of stock, its valuation, and shareholder rights that otherwise seldom are documented. However, if the Buy-Sell Agreement lacks an effective funding mechanism, the negative impact on the company’s capital and cash flow could be just as detrimental or fatal to success.
Life and disability insurance policies generally offer the most efficient funding of the contractual obligations of a Buy-Sell Agreement, providing funds to repurchase of stock at the right time and in the right manner.
What if a company loses key members of the management or technical teams?
Key Person Insurance can manage the risk of losing a non-owner key person, which provides funds for the replacement of an employee due to death or disability. No company would fail to insure for replacement of facilities or equipment lost to fire, disaster, or theft. The loss of key people is an extension of the same prudent risk management.
However, companies tend to define replacement costs in terms of recruiting and training, forgetting less tangible yet calculable losses. When a key person is no longer available for any reason, revenues can be interrupted, innovation can be undermined, influence with capital sources or suppliers or regulators can be damaged, industry leadership and reputation can be impaired, vital client or customer relationships can crumble.
Not only are funded Buy-Sell agreements and Key Person policies necessary to prevent an immediate crisis that would result from such an unexpected loss, they are critical to long term ownership transition strategies. Whether business transition plans are built around external buyers or internal buyers or family successors, they will all need to have contractual agreements and funding in place to manage risk during the transition process.