As a small business owner, you’re probably focused on marketing, client relationships, growing your business, more effective leadership, using data—there’s a lot to pay attention to. But in all that, you may be neglecting something no one really wants to think about: what happens to your business when you die. It’s important to have an exit strategy, not just in the event of your death but also if you want to retire or have an unexpected change in health that takes you away from your company. Planning for the future of your business now, before you think you need it, will bring everyone involved peace of mind and confidence that the business will survive even when you’re gone. Here are some things to consider.
Long-term insurance
As difficult as it may be, even the most healthy business owner should put a plan in place for the unexpected. If you’re a responsible business owner, you probably know how to cross the t’s and dot the i’s on current matters, but most don’t think about what happens after they die. Frequently business owners have health and dental insurance, but things like funeral insurance (also known as “final expense” and “burial” insurance) are worth considering. Funeral insurance is a policy that can cover the financial burden of burial and funeral services after someone dies. You’re never too young to purchase it, and in fact, it is usually cheaper the younger you are.
Also, consider business life insurance in addition to funeral and personal life insurance. Whether you have business partners or just employees, this form of insurance will protect them from a precarious financial situation after your death. There are a couple of options here, key person insurance and buy-sell agreements. Key person insurance can help the business cover the costs of replacing you, pay debts or severance if it shuts down, or cover loss-of-business costs resulting from your death. Buy-sell agreements are useful for businesses with co-owners and outline prices and terms for the remaining partners to buy your share after you’re gone.
Supporting your business partners
If you’re in business by yourself, this may not be relevant. But if you have business partners, or even employees who may be interested in taking over the business, it’s important to protect their interests. If you die without a plan in place, your partners or employees may find themselves working with someone they don’t know—whoever the state determines is your heir—or without a clear path to continuing to run the business.
After your death, remaining partners can liquidate the business, sell to your heirs, buy the heirs’ share, or take on the heirs as new business partners. These options can all be problematic if they weren’t agreed upon ahead of time, for both your partners and heirs. Talk to everyone involved and outline this in your succession planning documents (more on that shortly).
Maintaining a family legacy
Is your business a family business? In order to pass it on to the family member who wants to take it over, you need a clear plan in place. If you have multiple children and only one wants to run the business when you’re gone, outline this in a succession plan that’s separate from your personal estate plan. Otherwise, there’s a good chance no one will get what they want or think they deserve, and serious family rifts can occur in such situations. You certainly don’t want that to be your legacy.
Succession planning
Succession planning is to your business what estate planning is to your personal assets: a formal process of planning for your death as a business owner. You have a couple of main options here: sell the business and give employees, partners, or family members a share; or name a successor. Which one you choose will be based on frank conversations with your co-owners, employees, and family members about their wishes. You may only be thinking about a succession plan in the event of your retirement, but no one knows when they’ll die, so sooner is better when it comes to doing this legwork.
Some questions to ask yourself at the beginning:
- Who do I want to hand the business over to?
- Who wants to run the business when I’m gone?
- How much is the business worth?
- How will the succession be funded?
- Who will be involved in the succession process?
After you have a clear vision, there are a number of steps to go through. First is choosing what type of succession plan to establish.
Types of succession plans
You have several options. You can sell the business to a partner; when you die, they’ll purchase your share from your heir(s). In this case, you’ll want to look into a buy-sell agreement and getting term life insurance or key person life insurance.
You can pass your business onto an heir. This option is best if you run the business on your own. It can be a good way to provide for your family if you know that someone in the family is willing to take on the responsibility of running the business. If you have multiple heirs, make sure you know who that will be and what other heirs will receive when you die. Providing instructions on leadership structure is helpful here.
If you have dedicated employees, one of them may be interested in taking over the business. This also requires a buy-sell agreement to be in place. While most employees may not be in a position to have the cash on hand to buy the business outright, you can work with them to establish seller financing, where the employee will pay your family back over time.
If no one in your family or business is interested in taking over, consider planning to sell the business to an outside party. This will require a lot of research on your part to identify interested and suitable entrepreneurs or competitors as well as document for them that your business is a good investment.
Finally, if your business has multiple owners, you can sell your shares back to the company. Each surviving owner will purchase part of your holdings from your estate. If you want to go this route, the business should buy life insurance for each owner, which can then be used to make the purchases.
How to establish a succession plan
Documenting all these choices and steps gets complicated, especially for businesses that are not simply sole proprietorships. You’ll want to work with a lawyer to make sure all the paperwork is in order. But before you get to that stage, there are several things you can do to achieve clarity on your goals, such as documenting your current and future organizational structure and assigning someone who will be responsible for the execution of the plan. EDSI provides a good guide to succession planning for small businesses you can use to help think through this complex process.
No one wants to think about their own death, but getting your financials in order now with the right insurance options and a succession plan will make your small business that much more secure.
Hilary Thompson is a freelance writer, small business owner, and mother of two. With a background in content strategy, journalism, and business management, she loves to explore solutions for success, in all areas: health, business, parenting, life.
Death stock photo by Fahroni/Shutterstock
