What Happens to Your Business When You Die?

by David F. Woods, CLU, ChFC

As a small business owner or partner, you may wonder what would happen to your business should anything happen to you. How would your family cope with the loss of income? What about your employees and their families? It's likely these questions have crossed your mind. You may feel you have the answers, but before you take that leap of faith, take a look at these common myths and consider a reality check.

My Spouse Can Run the Business

In many cases, the spouse neither wants to nor is capable of running the company, regardless of what is discussed while both parties are still alive. Small businesses are often dependent on the marketing, technical or managerial skill of the owner. Take that away and the business may fail.

A Competitor Will Buy the Business

Possibly, but this may not happen to the advantage of the surviving family. The competition may be either looking to take customers away from the business, purchase equipment and inventory cheap (20 cents or less on the dollar) or buy the business at a low price. Sometimes, business owners think they can prearrange who will one day buy their business. But competitors are typically reluctant to share confidential and proprietary information with one another-a necessary precondition to ascertaining a fair price for the business.

Death Will Not Impact the Business

Each owner of a small business usually makes a very specific and important contribution to the business or has a special skill that is extremely hard to replace. When one owner dies, the surviving owner scrambles to keep the business afloat, find a suitable replacement, and keep funds from being wasted in the process.. Other issues may arise should surviving family members choose to participate in running the business or seek compensation for their share.

A Key Employee Can Take Over

Maybe so, but if without ownership, there is very seldom the same level of commitment. Furthermore, if the employee is truly running the business, he or she may require a salary commensurate with the added demands of the jobhigh-profile position and its many demands. In such a tight labor market, this can spell financial disaster for the business. And what then happens to the income for the surviving family, not to mention the salary needed to replace the employee's previous position? The funds needed to recoup from such a loss may be more than the business can bear.

The dealth of either my partner or myself
will not financially impact the business

Often, the deceased owner had a special skill or made a very specific contribution to the business that is extremely hard to replace. While the surviving partner scrambles to keep the business afloat and find a suitable replacement, precious funds are lost. Then there's the additional burden of legal problems from the widow/family members who are looking to be compensated for their ownership interests.

How Insurance Can Help

Now that you've considered the various scenarios that could take place, why not consider the solutions available to you to help ensure that your business, your family and your employees are protected. For example, sole proprietors may purchase a life insurance policy that covers them for the value of the company. That way, should the worst happen, the surviving family gets proceeds equal to the value of the business, whether or not they can sell it. When there is more than one owner, a "buy-sell" agreement funded with life insurance helps ensure that the remaining business owners have the funds to buy the company interests of a deceased owner at a previously agreed upon price. In short, the owners get the business; the family gets the money. To help protect a business in case of the death of a key employee, "key person insurance," payable to the company, provides the owners with the financial flexibility needed either to hire a replacement or work out an alternative arrangement.

To learn more about these and other options, and about the crucial role that life insurance can play in the future success of your business, meet with your insurance agent or other financial advisor.

David F. Woods is President of the Life and Health Insurance Foundation for Education (LIFE). Articles courtesy of LIFE . A non-profit organization.

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