Business Planning for Continuity

 “Life After Death”

For the owner of an interest in a small- to medium-sized business, such as a proprietorship, partnership, or corporation, the problem of an untimely death cannot be underscored too markedly.

In the first place, the very viability of the business may be in jeopardy upon the sudden death of the owner: loans may be called; work in progress may cease prior to the hiring of a replacement; and customers may go elsewhere. From the immediate family of the deceased owner, to the extended “family” of employees, to customers of the firm, many people may depend upon the uninterrupted continuation of the business. Knowing how the  business would run in the absence of the owner would be reassuring to all parties.

Secondly, stock or partnership interests in closely-held businesses are not publicly traded, so valuing shares at a time of crisis for the business may require the services of an appraiser and, possibly, settling for less than the fair market value (FMV) of the business. For a surviving spouse not interested in running the business—or for a family dependent upon the proceeds from the sale of the business—having the value of business interests established before the need for doing so arises can be a great comfort.

Finally, in cases where particular types of business ownership is involved (e.g., S corporations), a death can trigger an estate plan that may make sense for the deceased owner’s estate, but that may be a prescription for disaster for the business. For example, in the case of an S corporation, if the trustees of a family trust become stock owners, an inadvertent termination of the S corporation election can occur if the trust does not qualify.

Steps Toward Security
The heart and soul of a good business succession plan is a buy-sell agreement, which can exist between owners, or the business itself and the owner or owners. The plan is a legally binding agreement that obligates the estate of the deceased owner to sell the interest in the business defined at a predetermined price to the business itself (in a redemption agreement), to co-partners or shareholders (in a cross-purchase agreement), or to both (in a hybrid, or “wait-and see,” agreement).

Through a buy-sell agreement, a market for the business interest of the deceased owner is created, a price set, and an orderly transition of business is established. The agreement is typically developed by a team effort among the business owner, his or her attorney and accountant, and a life insurance professional specializing in business succession and estate planning for business owners.

Funding for business succession plan components, including the buy-sell agreement, often includes life insurance, which can provide tax-free money at the time when it is needed most (upon the death of the owner), as well as help fund a retirement or disability buyout in a tax-sheltered manner. A life insurance professional can provide advice on the selection of the policy best suited to a particular business/estate situation from among the myriad policies on the market today.

When choosing a life insurance policy to fund the buy-sell, selection criteria should include: the proper amount of death benefit; flexibility to change the death benefit should valuation of the business change; a cash value component (rich or lean, depending on cash flow requirements); and proper ownership, beneficiary designations, and endorsements (e.g., split-dollar arrangements, where corporate funds are utilized to pay premiums on personally-owned policies).

Plan for the Unplanned
In many cases, relatively few family businesses actually pass to the next generation. Many business owners put off setting aside the time to plan for the future, perhaps believing that untimely death is something that only happens to others. Of those who have developed plans, many may have not reviewed them in several years.

Planning and timely review are the keys to assuring the smooth continuation of a business and providing the needed security for those involved—the owner, his or her family, employees, customers, and even business creditors.

With so much depending on proper business continuation planning, the investment of the time involved to do so may be one of the smartest business decisions an owner can make.


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