What will now happen to his business and employees?
In this fictitious example, what typically happens is a forced sale of the business. Without proper planning, the estate taxes alone are often enough to make a sale necessary; however, even if this were not the case, the business line of credit and all outstanding loans would likely become due.
Now let's say that Bill survives the crash but, due to his injuries, is not able to return to the business. Where will the cash come from to buy out Bill's shares?
Whether through death or disablement, banks take a hard look at companies that do not have a clear line of succession, whether through a business continuation plan or through buy-sell agreements. By establishing the path for succession, these agreements greatly reduce or eliminate the uncertainties that arise in such times, enabling a company's partners or business successors to repurchase shares from the heirs of the deceased.
Furthermore, buy-sell agreements prevent or reduce questions regarding financial statements of the remaining owners and their ability to run the business.
Building the agreement
Working closely with a team of advisers, including an experienced business attorney, most of the life-changing, business-altering factors that can occur can be addressed through a business continuity agreement. The more issues addressed, the more likely future conflicts can be avoided or minimized.
Issues to consider include not just premature death or disablement, but also early retirement, divorce, business financial hardship, business valuation formulas and new partners. Anything that can impact the future success of the business is fair game.
An important person to include on the planning team is an accountant. Over time, even the smallest business can grow into a formidable-sized corporation. As a business changes over time, re-establishing its value on an annual or semi-annual basis is necessary.
In addition, the accountant should address the tax ramifications of various options such as an entity purchase buy-sell agreement versus a cross-purchase agreement.
Final piece of the puzzle
The insurance professional is another vital member of the planning team. Since life and disability insurance is very often a part of the funding arrangement, the insurance professional will help coordinate the complex task of funding the identified risk, using a mix of life and or disability insurance products.
While the age and health of the person involved could make it impossible to obtain insurance or have a significant impact on the cost, life and disability insurance is, in many cases, a practical and inexpensive option for funding the potentially catastrophic financial consequence of such events.
Working closely with the insured and his or her other advisers on an ongoing basis, the focus can then return to running the business with a few less worries.
Kåre "Corey" Backstrom, CLU, is a vice president and owner of Schiff, Kreidler-Shell Insurance with 13 years experience in benefits insurance. Schiff, Kreidler-Shell provides a full range of insurance products and services to businesses of all sizes. Reach Backstrom at (513) 977-3134 or firstname.lastname@example.org.