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I’ve always believed that most business owners are a single phone call away from extinction. Let’s spend some time today on what we can do to minimize the risk of ownership.
What’s next? What other risks can launch an attack on business owners today? Beyond the economic threats, competitive pressures and increasing taxes business owners face, there are other realities likewise out of our control but can be planned for and, in doing, so diminished.
Risk management is more critical than ever. As we lay in our foxholes and wait for the private capital markets to follow their 10-year transfer cycle, there are crucial steps to take immediately to protect business value and make the business ready when the timing is right.
• Buy/sell agreement. What would happen to your business if your partner or co-shareholder met an untimely death? Do you have a buy/sell agreement? Is it up to date? Does the price reflect today’s valuation?
Unless you reviewed your agreement in the last 12 to 18 months, it might pose a serious threat to you, your business and your family. Is the agreement funded with life insurance to make it robust and functional? Without appropriate funding, the weight of additional debt assumed by you, your partner(s) or the business could be devastating.
A well-planned, well-funded buy/sell agreement protects the business, the family of the deceased shareholder and the surviving shareholders and investors from losing value.
• Cost of insurance. Business owners have found that the cost of insurance has come down substantially over the years and that a review of all corporate and personal life insurance policies is essential. Policyholders have saved thousands of dollars (in some cases, hundreds of thousands of dollars) over the life of their policies by consolidating and restructuring their existing insurance and making sure critical gaps do not exist.
• Loss of key people. Another potential risk is the loss of a critical employee. Without the talent, loyalty and ongoing contribution of business executives, CFOs and high-level operations people, the business cannot run. By insuring the lives of these key people for their replacement value, it will ensure that the company will continue to run smoothly and maintain value.
Similarly, what will happen if the banks call in loans and mortgages that owners have signed for and guaranteed personally? An infusion of cash at a critical point in time (such as the death of the borrower or guarantor) can make the difference between business survival and failure.
• Non-equity performance package. How do you attract, retain and reward key employees? Everyone offers the typical package of 401(k), medical, dental, etc. An employer can make a difference by providing special incentive programs to reward long-term retention. This can be an excellent alternative to giving up equity or cash now.
These non-equity performance packages can be designed creatively to align with corporate growth goals and increased revenues and profitability. The better the employee performs, the bigger the payoff in the end. These programs can also serve as a sort of “golden handcuffs” in that if the employee leaves before an agreed-upon timeframe, benefits will be reduced or forfeited.
• Policy reviews. Last but not least, any personal or trust-owned life insurance should be reviewed for cost-effectiveness. In a decreasing interest rate environment, many of these policies are not performing as originally expected. Even the finest insurers invest their reserves in fixed-income investments that have experienced the same declining interest and dividend rates we all have.
Understand your options. Should you skip a premium, borrow or withdraw against cash value? Reduce the amount of coverage? Utilize a tax-free exchange? Surrender the policy? Sell the policy? A qualified insurance professional can help answer these questions and potentially save you money while protecting your family and your business.
Value enhancement is also about avoiding risk. Loss of life is, arguably, the most significant risk out there. Don’t let it cause you to miss your window of opportunity to maximize sales price during the next transfer cycle.
Plan and address these contingencies. If you have discussed them in the past, now is the time to review and get a second opinion to make sure your dollars are spent effectively and business value is protected.