According to the latest data from the Bureau of the Census, there are roughly 5.9 million businesses in the U.S. Virtually all of these can be considered “small.” Only 18,469 (or less than one-third of one percent) have more than 500 employees. Even getting to several dozen employees is a feat worth of recognition: over 89 percent of businesses have 20 employees or fewer on their payroll. Despite the diversity in industries, resources, location ,and stage of growth, “the 89 percent” have one thing in common: you.
When the indispensable disappears
By you, I mean an owner who is an indispensable part of the business. What would happen to your business if you suddenly disappeared for a day? How about a month? And what if you never came back? Could your business continue where you left off, or it would simply collapse and disappear into the annals of failed ventures?
Most owners are so busy trying to grow their businesses that they don’t even consider what would happen to that same business if they were to die or become suddenly and permanently incapacitated. Those that are brave enough to entertain the discussion of their untimely demise do so using the conditional “if I die” instead of the certain “when I die.” For everyone, it’s “when.”
Significant impact on family business
The odds are quite good that as a business owner, most or all of your wealth is tied to your business.
The odds are also that your family may not have sufficient life insurance to stay protected. If they are counting on your stake in the business to provide for them, that may not be realistic if the value of the business dies with you.
Depending on the study cited, it’s estimated that most small business owners typically have anywhere from 60 percent to 100 percent of their net worth tied up in their business. The exit strategy is typically a partial or complete sale of the business at some unknown point in the future.
According to a recent study by LIMRA, a leading market research company focused on the finance sector, only 44 percent of U.S. households currently have life insurance. That’s a 50-year low. One-third of affluent families admit they don’t have sufficient life insurance to cover their needs and maintain their family’s lifestyle if the main income provider were to die.
The impact of not planning for your death has significant repercussions.
Take action to protect your personal and business interests
It’s time to protect your business and your family from yourself.
1. Revisit the terms of your personal life insurance policy and make sure it’s up to date. Are the beneficiaries correct? Is the value of the policy sufficient to maintain your family’s current lifestyle until the youngest child graduates college? Are big-ticket items like college tuition and mortgage balance payoff included?
2. Shop around. Term insurance rates have become increasingly affordable in recent years. Additionally, more sophisticated insurance products can also serve as tools for more complex estate planning requirements.
3. Have your business purchase a “key person insurance policy.” Commonly known as “Key man” insurance policy (they really should update that…), these policies are purchased by your company, the premiums are paid for by the company, and the beneficiary is the company. This has several important uses. First, it provides the company with a financial cushion to survive the death of its owner. If there are partners, then it is very important to also have a “buy-sell” agreement. This agreement states that upon the death of a partner, the business has the right to buy out the deceased partner’s equity. The proceeds of the key man policy are used to fund the acquisition of the ownership stake.
4. Prepare a secure file offsite with all of your passwords, account information, and file access information. With most key information locked away behind password-protected software, it’s critical that someone knows how to access your e-mail and file directory. You can keep this information with your attorney.
5. Have a contingency plan in place for your operations. Spend a day every six months making sure it is up to date and that key people are aware of what should take place when you die or are incapacitated.
6. Delegate! Stop being the only “key person” in your company. Give others a sense of ownership by making them responsible for important areas of your company’s operations. This is good advice, even if you don’t go anywhere for a long time.