Two Almost Always Necessities For Most Successful Business Owners

FORBES INSIGHTS 3/31/2015 @ 5:42AM

If something bad happens to you, such as an illness, disability or even death, there are often many people who want to make sure the business remains viable and that your loved ones benefit from the hard work put into making the business successful. To these ends, there are two strategies you need to put in place: key person life insurance and buy/sell agreements.

Key person life insurance is sometimes a necessity. There are a number of times when such insurance is important such as replacing profits or loss of capital due to the death of a critical employee, or to provide the financial resources to recruit and replace key employees.

Based on a survey of 513 business owners, a little fewer than three out of five of them have key person life insurance on someone at their company, if not themselves. Meanwhile, for those business owners without key person life insurance, almost three-quarters said that if something happened to them or another key employee, the business would fail or be harshly handicapped.

A further complication is that the key person life insurance was potentially dated and conceivably insufficient. In most of these situations, the business owners had not revisited the need for key person life insurance within the last three years. Hence, there’s a good chance that the key person life insurance might not be adequate or even properly structured to address the present needs of the company and the owners.

Aside from key person life insurance, when there are partners in the business, buy/sell agreements are usually very smart to have. “Few business owners want to be in business with the spouses or children of a partner who is no longer able to carry out his or her duties,” notes Frank Senseco, president of Seneco & Associates, an advanced planning boutique. “Severing ties in this type of situation is best accomplished with buy/sell agreements.”

“A buy/sell agreement is a legal contract that ensures when a trigger event occurs, such as the death of an owner, his or her equity in the business will be purchased and the proceeds of the sale will go to the heirs using a predetermined valuation criteria,” explains Anthony J. Carone, managing member of the specialty law firm Carone & Associates. “The agreement should also be structured to provide funding for the buyout. Commonly, life insurance is used for the funding.”

Of the 424 business owners surveyed with partners in their companies,nearly four out of five had buy/sell. Problematic is the fact that very few business owners have reviewed their buy/sell agreements or their funding mechanisms within the last three years. Meanwhile, many business owners in the survey reported meaningful changes in the fortunes of their companies making it likely that their buy/sell agreements and funding plans are likely out of date.

According to Carlo Scissura, president of the Brooklyn Chamber of Commerce and author of Maximizing Personal Wealth: An Advanced Planning Primer for Successful Business Owners, “Many business owners recognize the need for key person life insurance and buy/sell agreements. However, by not monitoring the situation and staying current, there are likely to be complications if something catastrophic were to happen. Mistakenly, for quite a number of business owners, the fact they did something is enough. They’re marking them complete on their to-do checklists and forgetting about them.”

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For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.