by Kevin Ward CFP® – Advisor
Back in July I wrote a blog about how and why business owners should diversify their personal net worth and overall wealth. So, how do you ensure that your business is diversified so that if something happens to you or another leader in the company, business can run as usual? The first step is to consider the business needs and roles of current or future partners/employees to create a transition or contingency plan.
If you have business partners, what will happen to the business if one of you dies, is disabled, or departs from the company? A well-written Buy-Sell Agreement will address the triggering events for an ownership transfer, the valuation methodology, and the mechanics or funding source for an ownership transfer (seller financing, bank financing, life, or disability insurance).
If an owner or key management team member dies or is incapacitated, there are several questions that need to be addressed:
- Does the company have the balance sheet strength to absorb the loss of a key person and/or hire a replacement?
- Does the company maintain Key Person life insurance on owners or employees who are critical to the business so that the company receives a cash infusion either to stabilize the business, pay off company debt, retain key employees to protect against flight risk, fund an executive search, or hire their replacement?
- Who runs the business? Is it another management team member? A spouse? One or multiple kids? Do those key people have the appropriate desire or skill set to maintain the operation and lead your company? Is your hand-picked successor well-liked and respected by his or her peers and how would their leadership impact company culture? How would the loss of an owner or key person impact employee morale?
- If there are multiple partners, is the company’s attorney neutral enough that they can draft the document for everyone’s benefit or should each partner hire their own attorney to represent their individual best interests?
Unfortunately, companies that don’t have a detailed Buy-Sell Agreement for all owners may face years of turmoil and potentially costly lawsuits. We know one company where one of the partners suddenly passed away, entitling his widow to the value of his shares. However, the buy-sell agreement did not define the method for valuing those shares. While an independent party was hired to decide how much to award the widow, she did not agree with the decision and filed a lawsuit against the other owners seeking much more money and diverting the owners’ attention from the business.
The Buy-Sell Agreement and funding mechanisms should be reviewed every couple of years to ensure the plan has not outgrown the needs of the company and/or dollar amounts covered by insurance or financing resources available. Ensure that all major stakeholders (families, key employees, advisors, etc.) are aware of the plan and location of these documents/resources.
These are conversations that we are constantly having with our business owner clients. If you want to start a conversation and how the Borglum Team at Moneta can help you, please don’t hesitate to reach out to me at kward@monetagroup.com.
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