planning for the future
The day-to-day running of your business probably consumes much of your time. However, despite daily pressures, it’s important to plan for your business’ future and longevity. Developing a detailed business continuation plan (aka business succession plan) is essential to ensure that your business can continue operations and transition if something were to happen to you or another key employee.
As a business owner, you need to identify various scenarios that your business could face and develop a plan for how you'll manage if one occurs. Without such a plan, your business faces almost certain turmoil and potential failure. Planning now can avoid a crisis in the future….and the future can be as soon as tomorrow.
From a risk management standpoint, every company has its own unique needs and challenges depending on the corporate structure, employee organizational structure and line of business. As you identify continuation plan risks, insurance might not immediately come to mind; however, it is often a key tool for helping your organization to manage such situations. For example:
- If certain key employees, including the owner or others, have knowledge or talents that are significant to the company’s revenues and financial success, what would happen if he/she was to become disabled or die? Purchasing disability and life insurance on these employees can provide a funding source to stabilize cash flow and profits if something should happen to them. This would allow the company time to restructure or hire new talent to replace the loss to the organization.
- If an owner was to die, his or her heirs might be faced with significant taxes or expenses. To ensure that their short-term financial concerns don’t destabilize your company’s future, you may want to consider purchasing life insurance that would pay these obligations.
- If an owner dies, will his or her heirs be involved in the ongoing running of the company? Will stakeholders have the necessary funds to buy out the financial interest of heirs? Again, life insurance can provide an income source to address these situations.
business continuation plan & buy/sell agreements
Working with legal council, business owners can create an agreement outlining how their interests would be bought out upon their death. In many cases, the purchase price is often so substantial that surviving owners or other designated buyers would not have or be able to raise the money on their own. Life insurance can act as a funding mechanism for the purchase to solve this problem. In this case, owners would purchase life insurance policies on each other, and upon an owners death, the others would receive the funds necessary to purchase the company. Similar plans can be drawn up to cover other situations including retirement or disability of an owner using either life insurance that would build a cash value that can be borrowed or disability insurance that would pay funds in the event that an owner becomes disabled. While the principles behind every business continuation plan are similar, the details of each plan are unique to the challenges you identify during the planning process.
work with knowledgeable professionals
Creating a business continuation involves two parts: 1) developing a legal document and 2) providing a funding mechanism. Be sure that you are working with legal and insurance professionals that have experience building business succession plans. It's important to complete both steps in the process. Sometimes a business will develop a plan but fail to implement the funding portion. In other cases, a company may purchase insurance protection but fail to put the details down in a legal document. Doing one without the other can lead to problems when the plan needs to be implemented.
Often the two components can be developed simultaneously. Because a person's health situation can change quickly, we recommend speaking with an insurance professional first in order to get the process going. We have access to business valuation tools that can assist legal counsel when drafting the legal agreement. If you don't already have a legal advisor, we've worked with a variety of attorneys who can assist you.
To learn more about how we can help you build your business continuation plan and discuss your needs, please email, call or visit us.