As a small business owner you have a lot on your plate. Realistically the question of “what happens to my business when I am gone?” is probably not one of them, but it should be. This question is especially important if your small business is a Partnership, LLC, or Corporation.
If your small business is a partnership, that means you share ownership with at least one other person. This means that the partners must come up with a plan for the business in the case of an untimely death of one of the partners. If your business is an LLC or Corporation, it is actually its own legal entity. This means that that the business does not just “die” if an owner passes away. Appropriate plans must be put in place to maintain continuity.
What is Business Buyout Insurance?
Business buyout insurance is one such way that small business owners can help plan for the untimely death of an owner. Business buyout insurance is a type of life insurance policy that provides funds to enable remaining business owners to buy out the share of a deceased owner. It is also known as a business continuity policy or a buy-sell agreement.
Why do you need Business Buyout Insurance?
Studies have shown that the death of a founding entrepreneur wipes out on average 60% of a firm’s sales and cuts jobs by around 17%. This means that even if your business is on strong financial footing, the death of an owner may still push it towards insolvency.
If a business owner dies unexpectedly, their heirs may inherit their ownership stake in the business. This can lead to complications, such as disagreements among the remaining owners or heirs, difficulty in finding a buyer for the ownership stake, or financial strain on the business to pay off the heirs. Business buyout insurance helps to mitigate these risks by providing a lump sum of money to the remaining owners, which can be used to buy out the deceased owner’s share.
A business owner should have business buyout insurance to ensure that their business can continue operating smoothly in the event of their death. Even if the business has a solid agreement in place for the buyout of a deceased owner’s share, having buyout insurance can provide an additional layer of protection and help ensure that there are sufficient funds available to complete the buyout. It can also provide peace of mind knowing that their heirs will receive fair compensation for their share of the business, without disrupting the business’s operations or causing financial strain on the remaining owners.
Additionally, having a buy-sell agreement in place can help prevent disputes and disagreements among the owners, which can help maintain a positive working relationship and preserve the value of the business.
How much Business Buyout Insurance should you have?
The amount of business buyout insurance a business owner should have depends on various factors, such as the value of the business, the number of owners, and the ownership structure.
Typically, a business owner should have enough buyout insurance to cover the full value of their ownership stake in the business. This can be determined by calculating the current value of the business and multiplying it by the owner’s percentage of ownership. However, it is important to consider any outstanding debts or liabilities that the business may have, as these will also need to be paid off in the event of the owner’s death.
It is also important to consider any future growth or changes in the business that may impact its value. For example, if the business is expected to grow significantly in the next few years, the owner may want to consider increasing their buyout insurance coverage to account for this growth.
Overall, determining the appropriate amount of buyout insurance coverage requires careful consideration of various factors, and it is recommended that business owners consult with a financial advisor or insurance professional to help them make an informed decision.
More Information
Business buyout insurance can be arranged in serval different ways. The business structure and numbers of owners are the primary considerations when determining the most cost effective way to establish this coverage.
The most commonly used buy-sell agreements include:
- Cross-purchase buy-sell agreements, where all of the individual owners agree to purchase the interest of the other owners following an agreed-upon trigger event.
- Entity-purchase buy-sell agreements, where the business itself agrees to purchase the interests of each owner following an agreed-upon trigger event.
- A partnership buy-sell agreement, which utilizes a trust or partnership to facilitate the transfer of an owner’s share of the business to the remaining owners.
- A wait-and-see buy-sell agreement, where the owners agree that either they or the business will purchase the interests of a departing owner, depending on which method is most advantageous at the time. While these types of agreements can be helpful in reducing paperwork and affecting a smooth business transfer, they can also be very complex. They should only be drafted and reviewed by a qualified attorney.
Due to these many factors, it is important to plan with a licensed insurance professional in your state. The experts at SBG Insurance Group have years of experience in this field and can help answer your questions. Give us a call today for more information. We can help small business owners get the coverage they need to stay protected!
