How to Protect Your Business in the Event of Death

The death of a friend, acquaintance or family member is never an easy situation. When there is a death in your business, the process can be even more difficult. As a business owner, it is important to take proactive steps to protect your company’s bottom line if someone dies, be it you, a partner or a key employee. In this Sunbelt Business Brokers blog, we’ll look at how to protect your business in the event of death.

Structure

How your business is structured will dictate how key provisions are handled when someone dies. Depending on if you are a sole proprietor, co-owner or shareholder, the steps following death will be considerably different.

Sole Proprietor

Businesses that are structured as sole proprietorships usually dissolve in the event of the owner’s death. Because the title of the business is held solely in the owner’s name, they are directly liable for the finances, obligations, and assets.

Co-Owner of a Partnership

If your business is structured as a traditional partnership, the death of a partner would dissolve the partnership. However, with deaths in other types of partnerships, like a registered limited liability, the company is not automatically dissolved. In these cases, predetermined agreements will dictate the steps following a death. Written contracts include a mutually agreed upon purchase price for each partner, allowing the other to buy the share in the event of death.

Shareholder of a Corporation

Corporations exist independently from the owners. The death of one shareholder does not necessarily affect the company unless there is a written agreement that states otherwise. When a shareholder of a corporation dies, his or her shares are passed down as personal property to his or her heirs, according to state law or the shareholder’s will. A lot of large corporations will usually require a buyout of shareholders upon retirement or death.

Planning

Proper planning is essential when it comes to maximizing value for yourself, your business partners, or your heirs in the event of death.  As always, try to plan for the unexpected, which just means having a thorough strategy. Without a contingency plan, a premature death could lead to the business being sold, liquidated, or subjected to family feuds about who is the heir apparent.

Succession Plan

Forbes reports that almost 78% of business owners lack a succession plan. It may be uncomfortable to talk about and seem unnecessary now; a premeditated succession plan is essential to safeguarding your business goals.

Looking beyond the day-to-day and into an uncertain future, begin to think about what your goals are. Do you want to keep the business in the family? Who has the capacity to run the roost in the event of your death? Do you want your company to remain in its current market or shift to an international brand?

Create a succession plan long before you need it, and set it safely aside so when the time comes, the terms are already laid out and agreed on.

Business Valuation

Obtaining a formal business valuation from a certified business broker, like Sunbelt, is a critical step when planning for your company’s future. When calculating your business’s value, brokers will use historical data, tax filings, financial records, and more to determine a fair valuation. Knowing the true worth of your company will guide your strategy in the event of death.

Buy-Sell Agreement

A buy-sell agreement is another, legally-binding document that businesses with more than one owner need to have drawn up. This type of agreement lays out the cash flow for the surviving business owner in the event of death and is usually dependent on the business valuation. Buy-sell agreements will lay out: the price, the buyout terms, taxes, and other parameters. It is a good idea to have an attorney, financial advisor or business broker help you draft these terms.

Life Insurance

Some companies use life insurance policies not only as a form of protection but also as another way to accumulate money and ensure that your business can continue. There are two basic types of life insurance policies: term and permanent.

Term Life Insurance

In this type of life insurance, you simply choose a death benefit (an amount of money) and a term (how long you want coverage). This is a good option for business partners. If one dies first, the other is the beneficiary, able to use the life insurance policy to buy the business outright.

Permanent Life Insurance

Permanent life insurance policies are twofold: they offer insurance protection and an investment component, called “cash value.” This type of life insurance is more expensive than term life insurance. But, as a business owner, if you were to die unexpectedly, the company would receive both the death benefit and the cash value.

Recovering from a death in any business framework is a difficult experience. But as a business owner, if you are unprepared, death can cause a ripple effect that might disable your company. If you have questions about how to protect your business or are looking to buy or sell, contact your local Sunbelt broker. Our certified business brokers are professionally trained to assist you, no matter what the issue is.