How to Successfully Plan to Protect a Business

 A successful business begins with talented management.  However, that same business can suffer tremendously when a key employee or an owner dies or becomes disabled.  The financial impact that a death or disability of an owner can affect not only the ability of the business to survive, but also the overall value of the business.
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There are five questions a business owner should ask when thinking about protecting a business:

• Are there key employees who will make a substantial contribution to the success of the business?
• What would the financial impact on the business be if a key employee, including an owner, died?
• When the business borrows money, does the loan have to be signed for once or twice?
• How will any business loans be repaid if an owner suddenly dies?
• How will business overhead expenses be paid if a key employee or owner becomes sick or hurt and is unable to work?

Business Protection Planning
When evaluating the impact on a business at the death or disability of an owner or key employee, business protection planning can assist.  Since the death or disability of an owner or key employee can have a serious impact on future profitability, having a plan in place may be the key to the continuation of the business.  This change may affect a great number of people, depending on how many employees will be affected by the death or disability.  
If business loans have to be repaid, the personal assets of a small business may have to be used if there are not liquid funds available.  Without any liquid funds available to pay business overhead expenses, if an owner becomes disabled and is unable to work, there may be no choice but to sell or liquidate the business, even if a short-term recovery is likely.
Key Employee Indemnification
The most valuable assets a business has are not the building and equipment, but rather they key employees who make significant contributions to the success of the business.  The unexpected death of one of these key employees can have a serious impact on business profitability.  
Funds may be needed to supplement the business for the loss of a key employee for several reasons, including:

• Replacing lost profits
• Identifying, hiring, and training a replacement
• Providing financial reserves during the adjustment period following the key employee’s death
• Providing benefits to the deceased employee’s family
• Funding the purchase of a deceased owner’s interest in the business

Some key questions to ask when considering some of the issues associated with the death of a key employee are:

• Which of the employees earns the highest income?
• Is business management concentrated to a select few key people?
• Which employees impact the availability of credit?
• Are there employees with special or unique talents?
• If an owner or other key employee were to die, what would the financial impact be on the business?
• What would the cost of recruiting, hiring, and training a replacement be for a key employee?
• Does the business currently have the financial resources to withstand the financial consequences of a key employee’s death?

Business Loan Repayment
Many small business owners frequently have to personally guarantee a commercial with their own personal property.  Therefore, the owner’s personal assets could be at steak if the owner dies with an outstanding business loan.  Even if a personal guarantee is not required, many creditors require assurance that a loan will be repaid if the owner dies suddenly and unexpectedly.
Advance planning can help to minimize the negative financial impact of an owner’s death when there are outstanding business debts.  The business, the deceased owner’s family, and any other owners may be negatively affected financially.
Some issues to consider when an objective is to guarantee repayment of business loans at an owner’s unexpected death:

• Are there any outstanding business loans?  If so, for how much?
• Does the owner plan on applying for a business loan in the near future?  If so, for how much?
• In order to obtain commercial credit, are one or two signatures required for the loan?
• If the owner dies unexpectedly, how many outstanding business loans will need to be repaid?
• Are there any personal assets in jeopardy at the death of the business owner?

Business Overhead Expenses
When a business owner becomes hurt or sick and is unable to work, the day-to-day costs of operating a business do not stop.  Rent, salaries, telephone, utilities, and other expenses are a few examples of ongoing costs that must be paid for the business to continue without interruption.  
When an owner suffers a disability for a period of time, there are three alternatives with very different outcomes:

• The business can be sold to a potential buyer if one can be located that is willing to pay the purchase price.
• The business can be liquidated, forcibly in some cases, for pennies on the dollar.
• The business can continue to operate until the owner can recover from the disability, or until the disability is judged permanent.

If a disability is deemed short-term, most owners want to retain the business and continue working after the disability period is over.  However, without a source of funds to pay operating expenses, the owner may not have a choice in selling the business or liquidating any business assets.
When planning to keep the business up and running during a short-term disability period, there are some questions that a business owner should ask:

• How much are the monthly business overhead expenses?
• How would the business continue to pay overhead expenses if the owner becomes sick or hurt and could not continue to work?
• Does the business have sufficient retained earnings to pay the monthly operating expenses during the disability period?
• Should funds be borrowed in order to keep the doors open?  Could the funds be borrowed?
• If personal funds are used to cover the business overhead expenses, what will the owner’s family live on during the disability period?

With so many different areas to consider, carefully planning for protecting the business with a qualified financial advisor will keep a business and an owner’s family financially safe and secure in the event of an owner’s death or disability.