Edward is 38 years old and nets $60,000 per year. He is about to fall, and seriously injure his neck and put himself out of business. It will cost him about $2.5 million in lost earnings.
Like many people, Edward takes his ability to earn an income for granted. Clearly, this ability is his greatest asset. Without a plan, it may already be too late. Do you need life, and/or living benefits insurance for your business? As a business owner or professional, you face many challenges, not only in the day-today management of your business, but in ensuring its long-term stability.
Most of us spend more time managing the day-to-day operations than planning for the long-term continuity or for that matter the existence. That’s where this kind of insurance becomes effective. It can replace income and pay off debts. Insurance keeps together what you’ve worked hard to put together. In many ways, life insurance is a misnamed financial product. It’s not your life you are insuring, but your business and its future earnings. It makes sense to insure the things you value, including your business and your economic contribution to it.
Some Key Business Concerns:
• Loss of an owner
• Loss of a key person
• The risks of debt financing
• Attracting & retaining employees/executives
• Covering capital gains tax liabilities
• Business continuation & succession planning
Can you afford to let everything you’ve worked for slip through your fingers?
Many business owners don’t even know they have a problem — do you?
Understanding the issues means financial health for you, your business and your family. A business owner may be most concerned about the long-term success of their business, along with the profit and growth. As a business grows, so do the number of potential problems. Often, problems are recognized too late. Proper business planning will ensure your business continues to be successful.
Why Buy-Sell Funding?
If an owner or partner dies, or becomes permanently disabled, what will happen to your business? If no planning has been done, owners can suddenly find themselves in business with the spouse or executors of the deceased owner, or with a permanently disabled owner who can no longer contribute to the business. The survival of your business could be at stake. To properly manage this, the owners should enter into a buy-sell agreement to ensure their interests are protected.
What is Capital Gains Tax?
As a business owner, you have worked hard to build the value of your business. You may have started virtually from scratch or with relatively little initial investment. Your efforts have led to a sizable increase in the market value of your business as your surplus has grown and debt has been reduced. At this point, the value of your business may have increased well beyond your initial investment. This growth carries a hidden liability. If you die or sell your business, a capital gains tax is triggered.
Why Key-Person Coverage?
Disasters come in all forms. In the business world, the loss of a key employee can translate into corporate tragedy. The most important element of a successful business is its most valuable people. The loss of a ‘Key-Employee’ could seriously affect the position and public perception of your business.
Your sales could drop, your business’ cash flow could slow and its position with creditors and banks could become strained. A new person would need to be found and trained and guided to replace the ‘Key-Employee’. And this takes lots of time and money.
Loss of a Co-Owner
Let us imagine for a minute if your partner became an angel today, how would you feel about being partners with that person’s husband/wife or children? What impact do you think that would have on your business? Insurance can be a good way to buy your partner’s interest for pennies on the dollar. It would help fund a salary/buy-out that would be needed to pay the spouse (survivor).
Why are buy/sell agreements important?
When a business starts out, it’s often easy for co-owners to believe that they will be in business together forever. The reality is usually quite different. A business can be seriously disrupted if a partner leaves either as a result of death, permanent disability or retirement; the first two more so, because they are usually sudden.
Can your business survive a sudden loss of one of its owners?
I’m not a lawyer, but I always suggest that business partners protect themselves from such a situation through a shareholder’s agreement or buy-sell agreement. Sometimes, business owners fail to cover all their bases in these agreements. In my opinion all agreements should cover death, disability, illness, retirement and disagreement. It should also include a workable and accurate valuation formula forthe business. And above all make sure it is funded! If you do not have an agreement with your business partner, we really need to talk. I believe it will be worth a few minutes of your time to ensure your business is adequately protected.
What are your options?
Creating an effective business plan means ensuring the financial health of you and your business, and ensuring family is looked after. There are a number of ways you can fund a buy-sell agreement, protect against the loss of a key person or deal with capital gains tax.
Here Are Some Options:
• You can start saving today
• Funds can be borrowed from the bank
• Sell assets or
• Purchase some insurance to have immediate funds when they are needed the most
Life Insurance is generally the most economical solution
It can provide tax-free cash exactly when it is needed. It guarantees that money will be available to fund the buy-sell agreement, cover key person replacement costs, pay off a debt, or cover a large tax bill. I’m sure you will get peace of mind knowing these problems are taken care of.
Helping your business prosper
There are many different business planning models around that will help business owners from inception to succession, and they generally describe the same process. The development of a business can be reflected in three succinct phases, each having its own set of trepidations.
Business Classifications
• New business 1-3 years
• Growing business 3-8 years
• Established business 9 years +
An integral part of the business planning process is making sure that you have chosen the most suitable advisors to work with. It is a long process and you want to make sure you respect each other, work well together, are committed to putting personal and business needs first, and that they provide full disclosure, sound advice and professional service.
As you know there are many types of insurance products in Canada, so using a qualified broker who is familiar with the business marketplace is a must. That person will be able to take you through the process of selecting the right types of protection your business needs as well as protecting your family members. The amount is determined through a carful business insurance needs-analysis process. Your protection should not fall short of your needs at any time that’s why it is essential to have regular reviews.
Being an insurance broker helps to ensure that what you are paying is fair for this valuable protection and fits comfortably within your business budget. The other day I was talking to Cindy about a potential problem that might cause her to put her business up “FOR SALE”. She has a business partner and currently has no buy-sell agreement in place.
This is what I told her: If a business loses an owner, the remaining owner(s) must decide how the business will continue. Generally, you have four options. You can close down the business, but you likely wouldn’t want to after all the time, energy and money you’ve put into it. You can continue the business with the new owner (for example, the spouse of the deceased owner)… would you want to be in business with this person? You can sell your shares, but who will buy them and at what price? Or finally, you can purchase the shares from the deceased owner’s estate.
The following are some options and how they can help with funding:
A formal buy-sell agreement covers the terms of ownership and operation of the business. It usually deals with the death, disability, critical illness and retirement of one of the owners, as well as disagreements about running the business that result in an owner wanting out. The agreement often includes a formula or process for valuing the business to simplify the buy-out of an owner. Generally, the agreement deals with:
• Who will buy the shares
• What the terms of the sale will be
• When the sale will take place
• Where money to buy shares comes from
• What the purchase price will be
I might be a little bias on this point, but proper funding must be in place to ensure the agreement if viable. Without funding, agreements can fall apart because the remaining owners, obligated under the terms of the agreement to purchase the departing owner’s shares, may not be in a position to do so.
Funding A Buy-Sell Agreement:
• You can start saving today
• You can borrow the funds from a bank
• You can take the funds from current earnings
• You can sell assets, or
• You can purchase insurance to provide the funds needed
Insurance can be the most cost-effective solution to fund a buy-sell agreement. It guarantees that money is available when needed. What you get is peace of mind knowing things are taken care of. I always say it only takes pennies today to fund the dollars needed for tomorrow.
Please remember that I am not a lawyer or an accountant. As there may be legal and taxation issues involved, it is recommended that you seek professional advice first. As an independent insurance broker, working primary in the corporate and professional market place we are very familiar with how to package the best products and know about all of the available coverage’s. I’d be pleased to discuss your insurance, financial and tax planning with you. Everyone has different needs let me tailor it to yours.