How might the loss of a key employee affect your business? Will the business survive if a partner becomes disabled or passes? Do you want your legacy to include a business that survives years beyond you, or a business that folded because you didn’t protect yourself against the loss of a key employee or partner?
“Almost every company’s success depends on a few key employees and/or partners,” says Karl Hamilton, senior vice president and regional manager for SunTrust Investment Services in Tampa. “A certain employee’s knowledge is key to the business. One or two sales people may account for a large percentage of sales. A partner’s heirs may have no interest in remaining in the business. It is imperative that business owners consider these eventualities and put plans in place to protect themselves and their business.”
Smart Business asked Hamilton for insight on how business owners can protect themselves should a key employee or partner not be available to the business for any reason.
What consideration should a business owner give to protecting themselves against the loss of a key employee?
While all employees should be, and usually are, important to the success of any business, some are most important or ‘key’ to its success. The owner should analyze who those key employees are. What does each employee bring to the business? What would happen if this one or that one were lost? How would that impact the operation? What would it take to replace that individual? How long and at what cost would it take to find a replacement employee?
As each employee is analyzed, the cost of protecting a potential loss is weighed against the projected cost of the loss if the person were not available for their job. Disability and life insurance should be considered. The amount of coverage will be determined by the analysis.
What additional considerations should be given to the potential loss of a partner in the business?
Besides the potential loss to the business because of the partner’s knowledge and responsibilities, the value of their share of the company must be considered. If the partner becomes disabled or dies, family members may want their share of the business in cash rather than ongoing ownership.
What is the value of the business? Is there sufficient cash available to buy the partner’s share? Most businesses rein-vest their cash into the business rather than placing it in a restricted fund to buy out a partner. Insurance may be a good option to maintaining a large cash reserve. Without proper planning, it might be necessary to sell off assets or the entire business to pay the family.
How are the cash or insurance needs determined?
It is important to do this analysis on a regular basis, especially in situations such as volatile property values or rapidly increasing sales and profits. It is generally recommended that partnerships consider re-analysis of the value of the business when the financial results of each business year are available. Besides profits and potential profits, current property values should be determined. Each partner should be covered by cash or insurance to pay off his or her share on a current basis. In no case should re-evaluations be made less than every two years.
How can a business protect against the loss of a key employee to another business?
Create defined benefit plans and retirement plans that are owned by the business and not portable. Because many of these benefit’s costs are based on age at time of inception, your cost may be much lower than it would be for another company to establish equal benefits when trying to hire a key employee who has been with you for a number of years.
What are the tax considerations on insurance and retirement plans?
In most cases, the cost of insurance and most benefit plans are an expense to the business and are therefore tax deductible. Be sure to discuss those things with your CPA to assure they are set up properly.
SunTrust Investment Services, Inc., Sun-Trust Banks, Inc., their affiliates, and the directors, officers, agents and employees of SunTrust Investment Services, Inc., Sun-Trust Banks, Inc. and their affiliates are not permitted to give legal or tax advice. Clients of SunTrust Investment Services, Inc., SunTrust Banks, Inc. and their affiliates should consult with their legal and tax advisor prior to entering into any financial transaction.
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Services provided by the following affiliates of SunTrust Banks, Inc.: Securities, insurance and other investment products and services are offered by SunTrust Investment Services, Inc., an SEC registered investment adviser and broker/dealer and a member of the NASD and SIPC. Insurance products and services are offered by Sun-Trust Insurance Services, Inc., a licensed insurance agency.
KARL HAMILTON is senior vice president and regional manager of SunTrust Investment Services in Tampa. Reach him at (813) 224-2517 or firstname.lastname@example.org.