Many of us are familiar with family estate plans, but did you know that you can create a succession plan for your business? Entrepreneurs understand the difficulties of starting a business; especially one that succeeds over a long period of time. How can you protect the business you have put so much blood, sweat, and tears into creating? A buy-sell agreement is a planning tool that governs who can purchase ownership in the business, when an owner can sell, and what happens when one of the owners passes away or retires.
I recently helped two young entrepreneurs who went into business, selling a niche product online that had generated brand recognition and substantial revenues over a three-year period. These two owners have hired employees to help with the day-to-day operations, but they continue to handle all of the marketing and web design. Both owners have young families to support. They approached me with a simple question, “What happens if one of us dies?” Here are the scenarios I laid out before them that would, in large part, be determined by the personalities of them and their spouses.
Scenario 1. An owner dies, and the surviving spouse takes 50% ownership of the company. The surviving spouse may have good intentions but lack the knowledge or technical skill to fill the void of the deceased owner. Alternately, the surviving spouse could disagree with the surviving owner and stonewall major decisions that need to be made. This could cause major problems for the continual operations of the company.
Scenario 2. An owner dies, and the surviving owner takes 100% ownership of the company. This leaves the surviving spouse no compensation for all the hard work and time the deceased owner had contributed to the growth and success of the company.
Scenario 3. An owner dies, and the surviving owner buys the 50% ownership from the surviving spouse to compensate for the time, money, and efforts the deceased owner put into the company. While this may sound like the best alternative, the majority of business owners that take this approach lose their business because of cash flow problems. Imagine trying to not only pay the surviving spouse hundreds of thousands of dollars, but having to hire new employees and train them on how to fill the void of the work the deceased owner used to do.
The buy-sell agreement solves the problems of each of these scenarios and uses insurance to make sure both owners are protected. The insurance compensates the surviving spouse and allows the surviving owner to continue operations with as little disruption as possible.
If you own a business and would like to see what options are available to protect your business and family, give me a call to schedule a consultation.