Business Succession Plans must include Life Insurance and the Walton Financial Group has advice for business owners
For advice about life insurance and business succession plans , contact the Walton Financial Group in Barrie Ontario
Why do your need a Business Succession Plan and how does Life Insurance factor in its development?
It’s not enough that you have a manager in place who can run the business when you’re not there. You need a plan in case you’re not there at all. Your plan should be deep. That is, it should specify the manager who comes after the manager who would take over for you. You also need a compensation plan that’ll retain these people working at their best without you.The purpose of succession planning is to make sure a company always has the right leaders in place should a change happen quickly. By failing to create an orderly plan for succession, your company may not get a second chance if it doesn’t adapt immediately after a key player leaves the company or passes away.
A key element of business succession planning is Life Insurance. Here is why:
DEATH OF KEY PERSON :The smaller your business, the more critical you’re likely to be to the success of the business. What if you were gone tomorrow? What if another employee – perhaps your most important employee – dies suddenly? Having insurance on the lives of key people in your business will provide cash to the business that could be critical to smoothing over a rough period, or even keeping the business afloat, while the rest of the team looks to find a successor. No wonder many lenders, and investors, require companies to carry key person insurance.
EQUALIZING AND ESTATE :If you own a business and have one or more children, but not all of them are working with you, you need to consider what would happen if you passed away. It often makes sense to leave the shares of the business to the child, or children, who are working in the business day to day. The reason is that the children who are not working in the business would likely have different objectives; they may prefer to receive dividends from the business rather than see all the profits reinvested each year, while those working in the business may have a different perspective. A better solution may be to leave the shares to the children working in the business and equalize things by leaving the other children cash provided by an insurance policy. The insurance premiums may be a small price to pay to maintain harmony in the family when you’re gone.
COVERING TAXES ON DEATH :Life insurance plays an important role in allowing your executor to be able to pay your final tax bill.
EFFICIENT TRANSITION OF OWNERSHIP AND CONTROL OF THE BUSINESS: Smooth transition of ownership is critical to the continued success of the company. When an owner passes, considerable uncertainty can permeate an organization. Therefore, preparation and proper execution of a succession plan can have a huge impact on future success of the business. A business can be dramatically affected in a number of ways if one of the owners is no longer there:
How is the business going to replace the owners contribution to the company?
How long will it take to find a replacement? And at what cost?
Will funds be available to buy-out the deceased owner’s estate? What is their equity interest? What is the value of the company?
When there are multiple shareholders, a buy/sell agreement funded by an insurance policy can answer all these questions and solve many succession planning needs.
