You own a small business but have you thought about what happens to your business when you die? Most people don't because they are uncomfortable with the thought. I get it; nobody likes to think about being dead, but not preparing for the worst case scenario leaves your business vulnerable. Many people assume that their business will just continue on per normal if they die. However, without the proper planning and documentation the future of your business can be questionable. So what happens to your small business when you die?
If you don't plan for death then turmoil can certainly ensue. If you don't have a clear contingency plan and then unexpectedly exit the scene it can often be disruptive to your businesses operations. If you have set up your business where it can't run without you then you have made a huge mistake. In that scenario your death will most likely kill your business. If your key team members can't operate the business without you then your death will cause turmoil in the business.
Do you have an exit plan for your small business? Many small business owners do not. You should start your business from the very beginning with the end in mind and that is what an exit plan is. How are you going to get out of this business? When are you going to exit the business? Where do you want to go, but more importantly why?
There are many options to exiting your business. You can sell your business to a buyer. You can retire. You can merge with another business or acquire a business. You could offer an IPO. You can get bought out by employees. You can even pass it on to your children. These are just a few common examples of exiting a business.
In order to exit a business there are some key things you need in place:
- Your business needs to be able to run without you
- You have to have a solid set of financials that are auditable
- You need a good customer base
- A strong brand
- A good set of detailed operations processes
- The ability to scale
A buy/sell agreement is kind of like a will, but not entirely. A buy/sell typically states a few things. First, what happens when you die as an owner or a partner? How does your share of the business get split up and how are your beneficiaries taken care of?
A buy/sell agreement will also typically state what happens when you sell the business. How are the partners paid out? Who has the first right to buy? Even if you are a sole owner and don't have partners you should still have a buy/sell agreement in place so everything is spelled out exactly as you want it to go down if you pass away or sell the business.
A buy/sell agreement is definitely something you need a lawyer to produce for you.
Key Man Insurance
Having key man insurance in place for you small business is critical. Key man insurance is often overlooked by small business owners as they see it as an unnecessary expense. However, key man insurance can save your business in the event of your death. Key man insurance is a life insurance policy on the key people within your business. In a very small business typically the business owners or partners take out key man insurance. Often times a business owner will also take out a key man insurance policy on a key employee or two. In the event of the death of someone with key man insurance policy in place the life insurance policy would pay the company the value of the policy to help replace that person and get through the tumultuous period that follows their death. Key man insurance can often keep the business a float and allow it to succeed. It is also common for a key man insurance to provide a death benefit to your beneficiaries in the event of your death. The key man insurance policy goes hand in hand with your buy/sell agreement. It is important that your insurance agent and lawyer work together to make sure the buy/sell agreement and key man insurance work the way you want them to.
Plan Your Business Around Death
I always tell business owners that they should run their business with the mentality that if they died today their business would continue on with little interruption. Not only should the business continue on, but it should thrive. Back to my point earlier if you have set up your business where it can't operate without you then you have made a huge mistake.
Some people have a hard time with the mentality of running their business where they could die today and it wouldn't matter. However, this approach allows your business to be very scalable. Additionally building your business where it can operate without you is what will allow you to eventually exit your business.
Is your business prepared for you to exit?