When individuals take the leap to start their own business, they often throw everything they have worked so hard for in to a grandiose idea; not knowing what the outcome will be. According to the Small Business Association, 70% of businesses succeed during the first two years of being open, 50% during the first five years, and 66% during the first ten. With odds like this, almost two-thirds of individuals who start a business will be developing a plan of succession after the first decade of operation.
So, how do owners and decision makers of privately held businesses even begin to think about what their legacy will be after they’re gone? Maybe they have a child who will take it over, or a right-hand person who has seen the ins and outs of the operations for many years, or a savvy investor who has been knocking at their door for the past five years, wondering when they’ll have an opportunity to take the reins. Whatever the case may be, an important piece of the puzzle – to protect the leader of the organization and their family – is having a buy-sell agreement in place.
In short, buy-sell agreements are legal documents that allow for proper and organized business succession without concern of any financial ramifications. They outline the procedures for a hassle-free, and neatly planned business transition if an owner decides to voluntarily, or involuntarily transfer their interest in the company. This transfer triggers the buy-sell agreement, thereby providing an opportunity for the other owners or business partners to purchase the transferring owner’s interest in the company. It effectively restricts the purchase rights, keeping outside entities at bay.
It also protects members of the transferring owner’s family who may not be directly involved in the business, for example:
25 years ago, brothers Jack and John Doe started ABC Appliance Repair Company. Over the years, they made a comfortable living with their operations – each affording to have their wives stay at home to raise their children, take vacation annually with their family, and take time off when loved ones fell ill. They both had life insurance policies in place that would financially secure their outstanding personal debts (mortgage, cars), and allow for their spouses to live comfortably in the event of death. Because they operated a repair shop, they had little business value in inventory, but had substantial value in their book of business – Jack specialized in the engineering aspect (taking apart and reconstructing appliances), while John specialized in the electrical and re-wiring part.
A few weeks after John unexpectedly passed away due to a massive heart attack, Jack realized that he was unable to continue to work as a one-man-show. As the weeks passed by, the overhead costs went up; Jack was able to re-wire and configure electrical problems, but he had to sub out the electrical work to a local contractor. In addition to this, 50% of the profits were being paid to John’s widow for his share of the business, leaving Jack with barely enough money to get by. Unable to buy John’s half of the business outright, he was forced to close down, and get a job in a local hardware store working evenings – missing his daughter’s senior year volleyball games and track meets.
This tragic situation could have been avoided through the creation of a buy/sell agreement and the requisite life insurance purchase. Examples like this occur all the time and represent a blind spot for many industry professionals. Our organization focuses on the exact needs and potential exposure of our clients to protect them from risks that they may not have even considered. Here at Seltzer Group Partners, we are working every day to change the way that you view insurance.