Business owners overview

Your business is your passion, helping you protect it is ours

Business owners should ask themselves this question: If you were to leave your current business to start a new business, who would you take with you? Think about the value each employee you have brings — whether it’s their creative genius, sales acumen, or leadership qualities — and what those characteristics are worth to the business. Those that make the most impact to the bottom line are those that you cannot lose.

When an employee leaves, businesses can often spend a large percentage of the employee's annual salary to replace them. But the only cost to the business isn’t monetary.

A business purchases a life insurance policy on its key employee, pays the policy premiums and is the beneficiary of the policy. If that person unexpectedly dies, the company receives the life insurance death benefit. The purpose of key person insurance is to help the company survive the impact of losing the person who helps make the business successful. The business can use the life insurance proceeds for expenses until it can find a replacement employee, cover the costs to find, onboard and train a replacement employee, and pay off debts. In addition, if the employee stays with the business until retirement, the policy can be transferred to the executive or insured employee by the company as an employee benefit.

A buy-sell agreement is a legally binding agreement that requires one party to sell and another party to buy ownership interest in a business. A buy-sell agreement can be designed to protect the business in the event of certain triggering events, such as the death, disability, divorce, or departure of an owner. The buy-sell agreement stipulates how much one party must pay the other’s estate, heirs, or the business itself for their share in the business should the triggering event take place, as well as the method whereby the business value will be determined at the time the event occurs. It may also include other relevant details such as the source of funding for the buyout and who is eligible for payment under the agreement.

There are different ways to structure a buy-sell agreement. The structure you choose should be based on a number of different factors, such as entity type, number of owners, etc. It’s recommended that you consult with your attorney to determine the structure that best suits your situation. However, the two most common structures are an entity or stock redemption plan and a cross purchase plan.

When choosing a successor, your decision should be based on who can do the best job — not on prejudice, biases or a sense of entitlement. There are some basic traits you should look for in the individual you choose to take over your business, which we call the 5 C’s: Character, Confidence, Capability, Competence, and Commitment. Sometimes the right successor isn’t in the business today and owners need to make the hard decision that’s in the best interest of the business to either hire outside management or sell the business to a third party.

The income replacement value is what you need the business to be worth to maintain your current standard of living after you leave. This value is irrelevant to a potential buyer, but vital to any business owner looking to plan for life after the business. To determine the income replacement value of the business, add up the cost of all the benefits you realize from the business (such as insurance, travel, meals, rent, etc.), plus your salary and bonus, and divide it by a withdrawal rate you are comfortable with (typically between 3-5%).

The difference between the income replacement value and the value you believe you could sell the business for today is your retirement income gap. Business owners often realize that the income replacement value is higher than what they think the business is worth. This gap can be reduced by either determining ways to increase the value of your business or by growing the assets you have outside your business (savings, real estate, investments, qualified plans, etc.).

If you are planning on staying on the payroll in retirement be sure to document what your roles will be and agree on compensation equal to the value you are bringing back to the business. Instead of calling it a salary, business owners often call the compensation they receive from the business in retirement a “consulting fee.” While this arrangement may be good for the retired owner, it may not be in the best interest of the new leadership, especially if the sole reason is because you need retirement income.

There are internal and external transition options. Inside options include a sale or gift to family members, sale to an existing ownership partner or key employee, management buyout, and an ESOP (Employee Stock Ownership Plan). Outside options include a sale to a third-party, private equity sale, and liquidation. There are pros and cons to each exit strategy. You’ll need to spend time not only in the selection process, but also giving consideration to how your chosen exit strategy will impact your future income needs.

No, only children working in the business should get the business. The children working in the business should not be forced to share in the decision making and profits of the business with siblings who have no involvement. Instead, children not involved in the business should get other assets of equal value. Estate equalization is a strategy that helps ensure all of your children get a fair and equitable share of your estate while keeping the business in the hands of the decision makers who are running it day to day.

When choosing a successor, your decision should be based on who can do the best job — not on prejudice, biases or a sense of entitlement. There are some basic traits you should look for in the individual you choose to take over your business, which we call the 5 C’s: Character, Confidence, Capability, Competence, and Commitment. Sometimes the right successor isn’t in the business today and owners need to make the hard decision that’s in the best interest of the business to either hire outside management or sell the business to a third party.

Choose the right successor is critical to the long-term success of your business. To adequately prepare them for assuming the leadership role in the business you should Implement a successor development plan begins with an assessment of the successor’s current skills and interests, and defines what additional experience, education, and training must be achieved. In addition, successors should ideally spend 3-5 years gaining work experience outside the business and utilize a mentor outside the business to act as a coach, advisor, and educator.