What Should I Do After Loss of Business Partner?
Your business is worth $2,000,000 when your business owner dies or becomes permanently disabled. If you have not planned properly, the business might not survive ruining your income stream, as well as the future income of the deceased or disabled partner. If the business does survive, how are you going to come up with $1,000,000 to buy out your partners spouse or estate? If you don’t have the money, did you just inherit an un-wanted partner who knows nothing about the business?
Steps to Successful Business Succession Planning
- Understand the Need
- Place Value on the Business
- Select Plan Type
- Have Attorney Write Succession Planning Contract
- Execute the Plan
- Continually Re-Evaluate the Value of the Business
- Make Changes to the Plan to keep up with the value of the Business
Valuing the Business:
An appraisal company will appraise your business and determine fair market value that will be acceptable to the IRS.
Types of Business Succession Plans:
Cross Purchase Plan – An agreement between business owners to collectively purchase the interest of a deceased or permanently disabled owner at a specified price.
Entity Redemption Plan– An agreement that the business itself will purchase the interest of a deceased or permanently disabled owner at a specified price.
Financing the Arrangement:
Life Insurance – Provides you with the cash you need precisely when you need it. The death benefit is not subject to federal income taxes and the wide variety of life insurance products available helps you create a tailored policy that does not put a financial strain on your business now or in the future.
Disability Insurance – Pays the business when needed because a partner can no longer work due to permanent disability. That cash will be used to buy out the disabled partner.
Borrowing – Relying on the ability of surviving owners to borrow money to purchase the interest of the deceased party. Not recommended because the death of a key employee usually impacts credit, and banks can decline to extend the loan.
Sink Fund – The business and its owners put aside capital each year to prepare for this circumstance. Not recommended because it uses after-tax dollars to fund. If the unexpected happens, there may not be enough money set aside to cover the loss.
Installments – The owners sign an installment note to trigger the buy-out. Works great if the business is prospering and all owners are well-equipped with business funds to make installments. If not, owners have to use personal money to make payments.
Benefits to a Successful Business Succession Plan
Besides the “big win” of having your business see another day, there are a bunch of “little wins” along the way that should be equally praised.
These “little wins” can be broken down as follows:
- Determining that your business has a place in the market to be profitable for many years to come
- Allowing remaining owners to continue business without interference from deceased owner’s heirs
- Helping deceased owner’s heirs receive a reasonable price for business interest
- Providing liquidity for the estate of the deceased owner by turning interest into cash
- Establishing the value of the business for federal tax purposes
Partnerships are very common in the hospitality industry, as they provide an easier start-up. It is always good to be prepared for even the worst scenarios. Make sure that you protect your restaurant by contacting H&K Insurance and setting up your plan today!
Brian Kilcoyne marries restaurant owners with custom policies all throughout the Greater Boston Area. He prides himself in protecting your assets just as much as he takes pride in watching his son do battle on the wrestling mat and skiing with his family. No matter if he’s in front of a client or atop a mountain, Brian puts forth his best effort in everything he does. Contact him at 617-612-6515 or email him at briankilcoyne@hkinsurance.com.
