By: Gina Schenk & Tara Manis from Western & Southern Life
The untimely death of a key person (an employee who is vital to a business or organization) can happen at any time — and without warning. Key person insurance, which is owned by the company, is designed to provide a shot of liquidity to your business to help it weather the financial storm caused by the unexpected loss of someone whose role is vital to managing the company’s day-to-day financial priorities.
Key person insurance can also enable the company to purchase any ownership interest the deceased key person may have had from the estate. But this would generally require having a buy-sell agreement in place, a contract that can also help you deal with other kinds of wayward elephants.
For example, if you and a business partner have a falling-out — and your partner wants to leave — the buy-sell agreement would dictate how you could buy out your soon-to-be-former partner’s equity stake. It doesn’t cost anything to create a buy-sell agreement (aside from possible legal fees), so it makes sense to put one in place as soon as you divide your ownership of the business.
Build Your Team
The lack of a business succession plan is a slow-moving problem that occurs when you don’t build a solid team who can take over in your stead. It might not be your highest immediate priority unless you’re approaching retirement — but it’s still a crucial consideration.
Business succession planning is also key to addressing the lack of an exit strategy. Just about any exit strategy requires you’ve equipped one or more key managers to take your place when you’re ready to retire.
If your exit strategy is to sell your company to an external buyer, that buyer will want to know the business won’t fall apart the minute you step out the door. Similarly, without succession planning, you’ve possibly lost the option to exit by selling your company to key employees who are prepared and eager to run it.
Remember, you don’t need to address all your financial priorities at once. But to help keep your three-ring circus successful over the long haul, you’ll need to tackle them in an organized, logical fashion.