Business owner overview > Business continuity

Protect your business, secure your future

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.