By Gerald Cecil
You know what can happen to your business in the event of a fire, tornado, hurricane, or some other natural disaster. That's why you purchase insurance; to cover your building, contents, liability, etc. But what about other risks that threaten the survival of your business that may not be as obvious? Could you temporarily replace your profit and meet payroll and other expenses after a loss? If it took 90 days to rebuild, you could still be out of business without the funds needed to pay ongoing expenses and meet the payroll for key employees.
What will happen to your business when you retire? In the event of your death? That's not a pleasant thought, but unless you've discovered a fountain of youth, it's not a mater of if, but when. Will the business also die, or can it be sold? Is there an heir or business partner to whom the business will be sold? Will your heirs receive the full value of the business, or far less? These types of exposures can be insured; let's take a look at how.
Business Income Continuation
Where does the money come from once the loss occurs? Great care is usually given to be certain building, contents, diagnostic equipment, employee tools, etc. are properly covered. Statements of Value are compiled and annual updates are made. But what about the loss to you, your employees and perhaps family members? Because while the business is partially or totally shut down, it is no longer generating revenue. This condition is made all the worse when an entire family is totally dependent upon the operation.
Business Interruption/Business Income Continuation coverage should be included in your commercial insurance package to assure that key employees (family members, best technicians etc.) are paid, ongoing expenses covered and profits maintained. A worksheet should be completed to assist you in determining the proper amount of coverage that you should obtain.
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In addition to business insurance coverage for natural disasters, such as fire, tornados or hurricanes, shop owners should have a plan to cover other losses. |
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Business Succession
Business succession is not quite as simple. A common concern for any business owner is, "What will happen to my business when I die?" Generally, you have planned to do one of three things: sell the business for a profit; keep it in the family; or liquidate the business.
In some instances it is simply impractical for the business to continue. Perhaps the business owner is childless, or the heirs have no interest in continuing the business. In that case, plans should be made for the orderly liquidation of the business. If the business owner dies, a life insurance policy could make up the difference between the actual value of the property and the liquidation value. This could be a 50 percent or greater reduction in the true value of the business.
Buy-sell Agreements
Suppose, however, that there is a willing buyer available. In that case, plans should be made for the business interest to be sold. An arrangement in writing, well in advance, is generally called a buy-sell agreement. The agreement should also be funded (backed up) by a life insurance policy. It may be an arrangement between a sole owner and a buyer, or between two or more owners. In any case, a buy-sell agreement removes any uncertainty or worry about what will happen to the value of the business in the event of an untimely death. The value of the business interest is insured so that surviving owners may purchase the interest from the deceased's estate. Or, the value of the business is retained for the family at the business owner's death.
It is human nature to want your business to continue after you're gone, preferably in the hands of a family successor. However, the costs associated with the death of the principal owner can sometimes make retention impossible. What characteristics should be present for retention to be practical?
- There is a family member who is willing and qualified to assume control of the business.
- The business has the capacity of being profitable with a secure future.
- There is adequate planning or dependent survivors who rely on the current income.
- There is adequate planning for the payment of death costs and debts when the owner dies.
Stock Redemptions
Typically, in a small family-owned corporation, there is only one or a few stockholders. Most or all of them are actively involved in the operation of the business. If the bulk of the owner's estate consists of closely-held stock, the heirs may be forced to liquidate. By using Section 303 of the Internal Revenue Code, the heirs can solve this problem and continue the operation of the business. Section 303 allows a corporation to purchase (or redeem) enough of its stock from the owner's estate to pay death taxes, funeral costs, and other administrative costs. Since this is a partial redemption, the family retains ownership in the business. The estate debts are paid and the business continues intact. (You should note that even if an owner's estate is highly liquid, it may be a good idea to take advantage of a Section 303 Stock Redemption anyway. A redemption is not taxed as a dividend, therefore, it's possible to take some cash out of the corporation on a nontaxable basis.)
Only a formal plan backed by life insurance can absolutely guarantee that a business owner can pass their business on to the next generation. And, only through life insurance can the business owner guarantee that surviving dependent family members will continue to be supported, or that uninvolved heirs will receive their full inheritances. All this can be accomplished by integrating a Section 303 Stock Redemption into a business owner's other financial plans.
Be sure to use your insurance professional to get the advice you need to assure continuation of your business, and to protect those you wish to protect.
 | Gerald O. Cecil, CPCU, ARM, is Universal Underwriters Insurance Company director, Market Development - Automotive Specialty Markets Division. For more information on business continuation planning, contact Marsha Thompson, (800) 840-8842, ext. 1616, or e-mail www.uuic.com/autospec. This article is provided for informational purposes only. Universal Underwriters Group is not providing legal or tax advice and assumes no liability concerning the above information.
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