Business owners thrive on resilience. They weather market storms, adapt to shifting trends, and tackle challenges head-on. But what happens when life throws a curveball you weren’t expecting? Preparing your business for death or disability isn’t a pessimistic exercise — it’s a proactive safety net, designed to protect you, your family, and the business.
Incapacitated, With No Successor
If a business owner becomes incapacitated without having designated a clear successor or legal authority, the situation can become complicated and contentious. Your spouse or other family members may find themselves at sea, struggling with unfamiliar business concerns while grappling with the serious change in your health.
- Legal uncertainty: Differing parties, including family members, partners, or even creditors, might claim authority, leading to legal disputes and delays. Existing contracts could be jeopardized, causing financial losses and erosion of business value.
- Legal intervention: Depending on the owner’s capacity, a court might appoint a guardian or conservator to manage the business. Potential problems here are manifest. This process can be costly, and the conservator may not be someone you would have chosen yourself. What’s more, conservator reports to the court become public record, eliminating financial privacy.
Death, With A Business Partner
Even if you have a business partner, your death or disability could have a devastating impact on the business. Ideally, you already have a buy-sell agreement in place, outlining the financial and legal steps involved in transferring ownership and ensuring the business survives and thrives beyond such a loss. This agreement protects both the deceased partner’s estate and the surviving partner’s ability to manage the business going forward. While a buy-sell agreement outlines the legal pathway for ownership transfer, the financial muscle behind the purchase often comes from life insurance. Typically, you’d get a policy on your partner’s life, and vice versa. The payout becomes the funding you need to buy out the deceased’s heirs.
Problems can arise, however, if the buy-sell agreement and life insurance policies aren’t kept up to date over the years. It’s not uncommon for business owners to let these agreements sit for a decade or more, even as stakeholders change and business value grows.
- Life insurance shortfall: Let’s look at two business partners, Joe and Linda. When they started their business, they each got life insurance of $2 million designed to buy out their partner’s heirs in the event of a tragedy. But that was fifteen years ago, and now the business is worth $8 million. If Linda passes away unexpectedly, Joe is looking at a $2 million shortfall to pay Linda’s family their fair share. He might need to borrow money or sell part of the company to come up with the funds the life insurance didn’t cover. That could hurt the whole business going forward, limiting growth and reinvestment.
- Valuation disagreements: Of course, the scenario above assumes all parties agree the business is worth $8 million. Unfortunately, valuation disputes can also occur in these situations, leading to conflict and sometimes legal battles.
It’s a good idea to get an estimate of the value of your business every few years. That establishes a basis that both partners agree upon and helps ensure that you can keep those life insurance policies in line with current risk.
Planning For The Unthinkable
Unexpected illness and accidents do happen. These are not easy things to think about, but making plans helps ensure your business, and all the families that depend on it, will be okay. Work with the counsel at Mahdavi, Bacon, Halfhill & Young, PLLC to put good back-up plans on paper now. Think about who you’d want making decisions if you got sick. And if you have partners, make sure you’ll have the money to compensate each other’s families if one of you should pass away.