The Death of a Business Owner

November 2024 Newsletter | By: Ian Sachs, CFP®, CLU®, ChFC®, CEPA
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moon, Risk Resource

The Death of a Business Owner

“We all die. The goal isn’t to live forever, the goal is to create something that will.” – Chuck Palahniuk, American Author

Every business owner must consider the inevitable question: What would happen to their business if they were to die unexpectedly? Decisions, along with the owner’s wishes, need to be clearly communicated in writing. Should the business be sold or liquidated? Should it provide ongoing financial support for surviving family members? Who would manage its operations? And which advisors can the family rely on for guidance?

The Importance of Business Continuity Planning

Business continuity planning identifies the critical functions essential to a business’s survival and outlines how to resume operations as quickly as possible after the death of an owner. This plan serves as a strategic guide, detailing the procedures, resources, and responsibilities necessary to sustain essential operations during a crisis.

Drafting a business continuity plan compels owners to address key questions, such as who will run the business in their absence. For businesses with multiple owners, these plans clarify roles, responsibilities, and expectations. Additionally, a well-crafted key employee retention plan can help ensure that indispensable team members remain with the business during a challenging transition.

Buy-Sell Agreements: A Must-Have for Co-Owned Businesses

If a business has co-owners, a written and funded buy-sell agreement is essential for ensuring an orderly transfer of ownership. These agreements can be made between shareholders, partners, or even a key employee and a sole proprietor. A buy-sell agreement obligates the business, surviving owners, or specified individuals to purchase the deceased owner’s interest. Key benefits include:

  • Creating a market for the business interest
  • Minimizing disruptions for those continuing to run the business
  • Providing liquidity to the deceased owner’s estate, converting their share of the business into cash
  • Establishing the business’s value for federal estate tax purposes

To remain effective, the agreement must address all potential transfer issues, reflect the current value of the business, and be adequately funded – often through life insurance or other financial tools – to ensure the necessary capital is available.

Life Insurance: A Critical Safety Net

The financial losses a business incurs upon an owner’s death can be significant. Purchasing life insurance – typically an affordable term policy – can strengthen the company’s cash position, protect the family from creditors, and ensure the business has the necessary funds to operate.

At Risk Resource, we guide our clients in selecting the most appropriate type and amount of life insurance, as well as structuring buy-sell agreements that align with their unique needs.

Ensuring a Legacy

While money cannot buy happiness or guarantee business continuity, it can provide peace of mind and stability during turbulent times. With a well-thought-out succession plan, a business owner can ensure their business continues to thrive, providing for their family and preserving their legacy even in their absence.

Planning for the inevitable is not an easy task, but it is one of the most important responsibilities of any business owner. By taking proactive steps today, owners can create something that truly stands the test of time.