As a business owner, you have two problems that need to be solved. First, debt does not end with death. Second, what are you going to do for money when you retire?
The answers to both are the bases of business succession planning. It’s a topic that often gets pushed to the back burner until it starts boiling over and it’s too late. As many of you baby boomer business owners are creeping towards your “retirement,” it starts becoming a more important issue. For my fellow Gen X’ers right behind in the generational chronology, you’d better pay attention because you’re time to start is now.
Let’s tackle each problem one at a time.
Problem 1: What do I mean by “debt does not end with death?” If you die, you don’t get to take your debt with you. It’s what you bequeath to someone else, namely your business partners, whomever they may be. That debt may have paid for a new building, an expansion, new product development or acquisition. Regardless of what it is, it needs to be paid and your demise will make that more difficult for someone else.
The reasons? First, you must be replaced. Someone must fill whatever role you played internally or externally. Either way, it doesn’t happen without financial or time investment and cost. Second, if your spouse is not your business partner, he or she may not want to take over your role. That means your business partner must buy them out. Finally, if there is no business partner, what’s the plan if you are no longer there? Does the burden fall on your spouse that wasn’t working in your business? To a key employee? Regardless of whom that might be, financial help to cover the debt is necessary.
Bottom line: Your untimely death exacerbates any debt left for the responsible party holding on to the bag. Leaving them without a plan and money to deal with it is negligent.
Problem 2: At some point, you’re going to sell your business to “retire,” right? Now I’m not suggesting you be put out to pasture. Retiring can mean travel, new business ventures, writing a book, or taking up a new life hobby. Retiring is just a word used to get to that next adventure, but in order to do that you better be able to pull out money to fund whatever is next.
The first problem had you dying. Good news, this one you live! The problem is how to transition out of your business and get compensated for years of hard work sleepless nights, and great success.
In the “old days,” it was more common for children to buy the family business and turn it multi-generational. That has become less common as children have found other means of making money and eschewing the thought of taking over Mom and Pop’s business. I’ve seen more cases in the past few years of business owners reaching their 60’s and desiring to transition out, but have no idea as to how or to whom to sell the business to. It becomes a new anxiety as they keep working at the job they desperately want to transition out of to start that next adventure.
Here’s the process solution to both problems:
1. Go to your business attorney and draw up a Buy-Sell Agreement. This agreement clearly stipulates what to do about money in the event of a death, disability or exit of a partner. It creates a game plan to buy out spouses and families, and deal with the financial responsibility of continuing debt for the remaining owners.
2. Fund your Buy-Sell Agreement with life and disability insurances. The agreement is nearly useless without a vehicle to fund it. Cash flow and reserves are not the answer. By leveraging the power of life insurance, a company can much more easily deal with the debt and future expenses of losing a partner or main business owner. It also allows the family to receive their just compensation for their share of the pie.
3. Buy life insurance that creates cash value. If you’re familiar with permanent life insurance products like whole and universal life, this might sound familiar. The business buys and owns the life insurance policy being used to fund the Buy-Sell agreement. When the owner decides to transition out (even if it’s the sole owner), the life insurance policy can then be cashed out and all the premiums paid over the years returned to use as part of the “retirement.” Note that this concept is more complicated in nature and you should talk with both your team of attorneys, accountants, and life insurance brokers for options and details.
Your two problems are real and they have financial ramifications for those that don’t plan ahead. It doesn’t matter your age or how long you want to own your business. Take responsibility for your debt, your retirement, and the well-being of those left behind holding the bag.
Business succession should not be left to last minute; otherwise, it becomes a crisis. Succession planning is a key part of risk management for any business. Why not start the new year off creating or improving it?
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