Critical steps to preserve the value of your business

There are steps that should be taken to preserve the value of your business. These steps are critical, if you are a sole owner. If you are a co-owner, these steps may also prove to be valuable.

Implement a stay-bonus plan for your key employees. Offer your employees a fixed-sum bonus to remain employed by your company, in the event of your death or permanent disability. Their continued employment can be for one or two years, or through the sale of your company. If the employees stay with your company for the predetermined period, they receive a significant bonus (typically 30% to 60% of annual salary) at the end of that period. The bonus can be funded with the life insurance on your life. The funding of the bonus with insurance will put the key employees' minds at ease that the funds will be available when they are required to be paid.

Stay bonuses work particularly well, if upon your death the goal is to sell the business to a third party. Alternatively, if you want your family to retain the business after your death, consider long-term cash-based incentives for non-family members. The creation of a Phantom Stock Ownership or similar non-qualified deferred compensation plan will meet this objective.

Address capitalization. Unless you are able to sell your business quickly, you will likely need to substitute cash for your personal guarantees, with respect to bank loans and lines of credit, leases, surety bonds, and vendors. The purchase of life insurance in an amount sufficient to pay down a portion of these obligations, and therefore reduce the financing party's exposure, is generally the preferred course of action.
Create a business continuity instruction form. This form instructs your family, key employees, and advisers of your wishes, regarding the continuation of your business. The continuity instruction form should, at a minimum, contain the following critical information: (i) account numbers and passwords; contact information for each trusted adviser; your preferred disposition of the business; and the roles and responsibility of each member of your management team.

Co-owners: Do you have a current Buy-Sell Agreement?

If you are a co-owner of your business, then hopefully you have a current Buy-Sell Agreement. One of the great benefits of a current Buy-Sell agreement is that it enables the business to continue when one owner dies. I often find that Buy-Sell agreements have been drafted many years ago and have never been reviewed or revised as the business has grown. An outdated Buy-Sell can be worse than having no agreement at all.

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