In my last post, I discussed business ownership continuity. Today, I will focus on what happens if your company loses financial resources and how to plan for that event should it happen.
Sole Owner Company
Sole owners typically give little thought to the loss of financial resources (represented by the owner and his financial statement) used for the benefit of the business. Without a replacement for that financial strength, the business may well not survive despite a plan in place for its continuity of ownership. More specifically, an owner’s sudden death or incapacity can cause other “stakeholders” to discontinue their relationships with the business. These situations include:
If you, personally, are a principal source for financial funding (bond guarantees, line of credit guarantees, etc.), your death can put enormous pressure on the business to perform or face the risk of third parties refusing to lend or make guarantees on behalf of the company.
Sole Owner and Multi-Owner Companies
The problem of dealing with unexpected losses or unexpected financial complications in the business can best be met in two ways. First, simply use life insurance to fund for the anticipated need. Although life insurance is part of the solution, it is a means to an end; by itself it is simply a source of cash. Realistically, if the business is to succeed long term, after your death, it needs more than life insurance. It will need successor management, motivated by ownership or cash (current and deferred). The only way to make certain the business continues without you is to make certain that the business is more than just you.
But any long-term solution, such as having a successor management in place today, cannot succeed without having adequate funds from the outset. And it is precisely this point that owners and their advisors overlook. The loss of an owner usually dries up the company’s financial wellsprings:
These resources propel the business through difficult times into a brighter future. It is highly unlikely that successor management or ownership can replace your balance sheet with theirs.
A company’s loss of financial resources can be mitigated by placing money, and lots of it, in the company coffers when you depart. A fully funded (with life insurance) buy/sell agreement (including a current valuation) just buys out the deceased owner’s interest. By itself, it does not place one penny in the company’s bank account. For that reason, few companies have adequate cash to survive an owner’s death.
To address the loss of financial resources, a business, for its own current and future needs, requires insurance on your life in an amount sufficient to replace its immediate losses and to provide it with adequate ongoing capitalization. These insurance proceeds will enable the business to grow and prosper without you and your personal balance sheet.
In my next post, I’ll discuss how to prepare the company for the loss of your key talent. Until then, if you’d like to get a copy of a Business Continuity Form, or talk about how to plan for the continuation of your business, reach out to me at 678.466.7885 or firstname.lastname@example.org.
©2007 Business Enterprise Institute, Inc., Business Continuity Planning White Paper.