As a business owner, you have put your time, work and money into your business to make it a success. To help protect what you’ve built you’ve probably insured your inventory, equipment, real estate and other physical assets. Yet the things that make your business successful, that make it stand out from the competition, probably isn’t any of those things.
What makes people choose you over the competition is probably you and your key employees who turn all those physical assets into the work of your business and keep the customers coming back. You could say that your employees are your most valuable asset. But…have you insured that asset?
If you lose or break a piece of equipment, it may be expensive but it can usually be replaced as good as new. Is the same true of your key employees, including yourself? If you or one of your key employees was suddenly out of the picture, how quickly could the business find someone to take that person’s place? How long would it take and how much would it cost the business to, let’s say, replace you? Could it even be done?
Just like you have insured your physical assets, you can insure yourself and your employees and help protect the value you bring to the business. Life insurance is one of the ways to help protect the business you created from the loss of an important employee.
Here’s how it works:
• First, determine who your key employees are. You are one, along with your more highly compensated employees and those who are an essential part of your company’s profitability. If the company would suffer a financial hardship in their absence, they are key employees.
• The next step is to work with your agent/producer to determine the insurable value of that employee to your company. One way is to use a multiple of up to 10 times the employee’s income. Another way is to consider the role that employee has in the company’s sales and profit. In general, the harder an employee would be to replace, the higher their insurance value to the company.
• Once you know the insurance value of the employee, the business could obtain a life insurance policy on the employee, with the business as the owner and beneficiary of the policy. There are strategies you can discuss with your agent/producer that can let you get your premium on the policy paid back to you down the road, or can let you build cash that eventually you can use to supplement your own retirement or to provide deferred compensation to an employee (the promise of deferred compensation might keep that employee with you instead of going to work for the competition).
If you and your employees are your business’ most important assets, doesn’t it make sense to protect them the same way you protect your physical assets?
One problem faced by owners of many non-publicly traded businesses is that there is no readily available market to sell their business. Business succession planning addresses this issue by devising a system for transferring the value of a business to the owner, heirs or others at an appropriate time and price while allowing for the continuity of the business.
Perhaps the most common business succession tool is a buy-sell agreement which provides for the mandatory or optional buy-out of an owner’s interest in the event of retirement, death, disability, divorce, bankruptcy, termination of employment, offers by outside parties, or disputes among owners. While the buy-sell agreement is one of the more common succession planning tools, we can also counsel clients on other pro-active strategies to protect value and continuity. Our business attorneys can assist owners in developing a strategy uniquely tailored to their business succession needs and goals.