It doesn’t make for pleasant conversation, but it happens every day…Business owners die.
And even as they pass on to the great balance sheet in the sky, their worldly business goes on… for better or worse.
I call this the “hit by a bus” problem, and it’s something we will all face: What will happen to your company if you get hit by a bus?
If you’ve signed a 3-year office lease, borrowed money to buy a company car, or just hired a few salaried employees, there are people counting on you to make continuing payments, whether or not your heart is still beating. It is a useful and important discussion to have with your family, your employees, your business partners, your bankers and your shareholders.
If you’re already thinking, “No problem, I’m insured!” … think again. Life insurance is NOT the answer. Life insurance can guarantee that your legacy to your spouse or your children won’t be a stack of unpaid bills. But life insurance for a business owner does not magically guarantee that the business can go on without you.
If you are in business with a partner or investor, you need more than just a life insurance policy, you need a clear written agreement between all stakeholders. (Usually this means all stockholders or partners and their spouses, but it could also include key employees or heirs.)
Here’s the problem: If you die, and your spouse inherits your ownership, will (s)he really want to work with your other partners? Can your spouse even do the job you are doing now? Do your partners want to work with him/her?
Every stakeholder should understand and sign what is called a “Buy Sell Agreement“. With that in place, the business continuity is more certain. Yes, your spouse still inherits your stock or ownership. But the Buy-Sell assures that the remaining partners or owners use the proceeds from your life insurance policy to buy that ownership from your spouse.
Your family gets cash, your partners get the company. It can be just that simple.
If the life insurance policy is big enough (or if you have two), the best arrangements mean cash is also available to pay off certain bills and to hire your replacement. It could be a long hard slog to re-build a company after the death of a principal… an extra cash cushion can assure that the partners, employees, and assets of the company are well cared for and not at risk after your untimely demise.
So before your bus finds you, please do these two simple things:
(1) Do the math. Every time you make an obligation for your company, be sure its backed up by a way to pay it off. Add up all your debts and leases, and get a policy that can cover them in case of your death.
(2) Call an attorney about a buy-sell agreement. Don’t leave your family OR your partners (shareholders, employees, etc.) out in the cold. When you die be sure those that survive you have all agreed on what happens next.
Dedicated to your (post-mortem) profits
PS: Learn a bit more about this topic in an article I wrote for AllBusiness.com