Plan for the loss of a key employee: you
What will happen to your business if a key employee is struck down by a long-term disability - or, worse, dies?
"Interesting question," responds Dave Kendle, an attorney whose specialty is closely held businesses and a partner in the Chicago law firm of Kendle Mikuta & Fenstermaker.
The question becomes even more interesting when we factor in that the key employee in many small and mid-size businesses is the owner.
"A lot of businesses just don't address this issue," says Sam Valeo, senior vice president wealth management in the Oakbrook Terrace office of Morgan Stanley Smith Barney. "There's a scramble to find out what the plans are" when what both Valeo and Kendle call "an event" occurs.
Putting plans in place that will help their businesses survive their own death or disability isn't something most business owners like to do. Valeo says it often takes "a life event that involves an immediate family member or a friend of the same age" to get the discussion started.
There are two keys to a transition, Valeo says.
"First," he says, "is to start grooming staff, to have a management team ready to step in and replace the owner. The other is to have key man insurance to help insure against the risk of loss."
Financial considerations, including taxes, and the structure of a business' ownership can make any transition complicated. If the business is a sole proprietorship, Kendle says the focus generally "will be on the family" and the transition often will be part of the estate planning process.
If there are multiple owners, a buy-sell agreement that requires the surviving owner or owners to purchase the deceased owner's share of the business and, by doing so, provide a financial settlement to the spouse, is typical. Buy-sell agreements normally are funded by life insurance.
Even that seemingly basic transition isn't always easy, however. The dollar amount involved is based on the value of the company. But, Kendle says, "A company valued at $200,000 twenty years ago may be worth $2 million today."
If the buy-sell agreement hasn't been updated, the old value is the basis for the purchase. Kendle suggests, therefore, that business owners "agree every year on the value of the company" and sign a certificate with the new number.
Disability of an owner is "much trickier than death (because) there often is no clear-cut trigger event" that sets a buy-sell or similar plan into motion, Kendle says. Uncertain recovery periods and the existence of any disability income coverage are other complications.
If your goal is for your business to live beyond you, planning should be a priority. Talk with someone like Valeo and Kendle. Get your accountant into the conversation, too.
Questions, comments to Jim Kendall,
JKendall@121MarketingResources.com. © 2010 121 Marketing Resources, Inc.
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