Many small business owners could testify to being time-poor, as they spend most of their waking hours thinking about and running their operations. While this is important for business success, owners also need to put some time into thinking about what will happen to the company when they are not around – whether because of retirement, injury or death.
Two-thirds of small business owners have neither conducted a formal business valuation or established a professional exit strategy. Without such foresight, the absence of the owner could force the business into liquidation. Other consequences include elimination of primary income for the owner and their surviving dependents, a greatly reduced sale price, and liquidation of other assets.
Small business owners who are concerned about the future of their operations even after they are no longer in the picture should consider buy-sell agreements, which determine a qualified buyer who will purchase the business interest at an established rate should an owner become incapacitated. Unless the business’ only other owner is a spouse, a company should have a buy-sell agreement in place.
Thirteen percent of small-business owners have a plan in place for disability and 21 percent have one in place for death. Owners’ life insurance policies are commonly used as the primary source to fund buy-sell agreements. The proceeds can offer a number of benefits, including: Help surviving family members maintain their standard of living for the foreseeable future; Cover estate taxes and estate settlement expenses; and Provide business partners with capital to sustain and grow operations.
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