You were hit and killed by a bus last night. How does your business look today? Will it keep running now that you’re no longer around to oversee it? Are your business, business associates and family facing a chaotic mess?
“That all depends on whether or not a business owner or partner has planned for an eventuality like this,” says Ken Greenfield, Director of Tax and Estate Planning for Investors Group. “In other words, you need to be prepared.”
Here’s what could happen if you’re not. If you die without a will your provincial government could determine what happens to your assets, including your business. If you pass away without the proper insurance, your business can go under due to a lack of funds. If you pass away without a shareholder agreement in place, your spouse could now become a partner to the business.
You should have a carefully crafted, and legally binding, shareholder agreement that documents exactly what you and your business partner want to happen should you or your business partner die.
“For all these reasons and a lot more, you should have a carefully crafted, and legally binding, shareholder agreement that documents exactly what you and your business partner want to happen should you or your business partner die.”
And yet, fewer than 30 percent of small-business owners have a written succession plan, and many don’t have insurance either, according to the Financial Planning Association. Why? Because owners don’t want to think about what might happen if they suddenly pass away.
But you should: things happen all the time and if you run a business with employees, or if your family depends on the income derived from the business, you need to make sure people are protected.
While a plan should be tailored to a business owner’s specific circumstances and objectives, there are common elements that require consideration, especially around insurance needs.
Key Person Insurance
This is a must for every business owner. It’s an insurance policy, taken out on the most important person in the company, usually an owner. If the key person passes away, the company gets the proceeds from the policy, which it can then use to continue running the business.
In many unfortunate situations, the surviving partner ends up buying the shares of the partner who passes away with their own funds or, worse, with bank debt. However, that partner can’t always afford to purchase those shares. With Buy-Sell Insurance, when a shareholder passes away, money gets distributed to the other partner to purchase their portion.
Business Loan Protection
Many companies have bank debts to pay and those payments need to be made even in the face of an emergency. This kind of insurance provides funds to settle any outstanding loans or mortgages.
As well, if you’re injured, but you’re off work for a long time, consider taking out disability and critical illness insurance, which can help you get through your time off by providing the cash needed to service the debt.
Clearly, succession planning and insurance coverage is absolutely necessary to maintain the value of your business, provide financial security for your family and other stakeholders, and provide for the unexpected. Talk to an advisor, accountant, lawyer or insurance broker to find out how best to protect your company.