By Scott Bushkie

Most entrepreneurs are a rare breed, full of optimism and confidence. But that same optimism it takes to run a business is the same sense of faith and certainty that can make them feel invincible. Every economic downturn is the last, every prospect is the next big sale, and every good leader retires happily with their family.

Unfortunately, none of us are invincible. And if you’re like many business owners, a significant portion of your wealth—and your family’s income after your death—is tied up in the business.

I strongly recommend you talk to your attorney about wills and trusts to protect your family in case you die unexpectedly. Then consider these other practical steps to minimize the effects of death or illness on your business:

Death in a Partnership. If you have a partner, update your buy-sell agreement to make sure it reflects your current business situation. I’ve seen many business owners set these agreements up when they start or purchase their company, only to let them sit for 15 years, unchanged as partners come and go and business value increases.

Many business partners will fund their buy-sell agreements with life insurance. This creates a sum of money that can be used to buy out your percentage of ownership interest if you die. Your family receives your share of the business value without threatening the company’s continuity. 

Get an updated estimate of value every two to three years, then adjust your agreement and the amount of life insurance accordingly. If you don’t, both your family and your business could be mired in litigation and financial difficulty.

I was brought in as an expert witness on just such a case in which the husband passed away and the partner offered the wife a settlement that she believed was well below market value. The conflict has continued for two years and six figures in legal fees, and counting.

In another possible scenario, let’s assume everyone agrees that the fair market value of your company is $10 million. But the last time you updated your life insurance, the company was worth just $4 million. 

Let’s assume the two partners were 50/50 and each had life insurance to cover their half of the business value.  That means your surviving partner only has $2 million in life insurance to pay your estate, leaving a $3 million gap.  That’s a significant liability for your company to bear, and paying down that balance will mean forgoing growth and reinvestment for years to come which could negatively affect the company and the chances of your estate getting paid.   

Death of Sole Owner. Even if you don’t have a partner, life insurance can still be a good tool to protect your business. This cash can sustain your family for a while, buying them time to sell the business or establish new leadership. It can also provide the business with the extra equity necessary to hire a transitional CEO or increase management salaries after you’re gone.

Beyond life insurance, have a plan in place to transition the business if you die. I’ve seen firsthand the effects of failing to plan, as I sat down with a red-eyed widow in her husband’s office, stacks of papers two feet high all around her. She was trying as best she could to keep the business together, but felt wholly overwhelmed by the task.

For me, I’ve made arrangements for my brother to come in and oversee my business if I die, with my attorney and father-in-law providing guidance. Together they can help my brother decide whether to sell the business to a third party, sell to the employees over time, or to put in a manger and keep the business running to provide ongoing income for my family.

Another practical step you can take to protect your business is to build up a management team or key employees. The more you can train key employees to do the roles you do, the better off your company will be, in the event of your death, illness (or even a business sale).

Whether your plan involves family members or a key employee, sit down and talk it through with everyone involved, including your spouse and attorney. There’s nothing worse than a loved one dying before they should, unless that tragedy is compounded by the stress and conflict that results when your survivors don’t have a clear plan for moving ahead.

A few meetings and a little legal guidance can go a long way toward protecting your family and your business. Put your optimism aside for a moment and plan for the worst. Otherwise, your family might lose you and then suffer the additional blow of watching your company crumble as well.

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A thought-leader in the industry, Scott developed the Cornerstone Process to offer investment banking M&A-level services to the lower middle market. The result is a closing ratio that’s more than double the national average.