May 31, 2019
Cambridge Investment Research advises that small businesses run these “fire drills” to prepare for emergencies:
- Liquidity: If a business owner has to write a significant check for something unexpected, like office repairs after a damaging storm, where will that $10,000 or $20,000 come from? Businesses typically don’t have substantial liquidity because so much of their capital is tied up in operations. As a result, lines of credit tend to be the most common solution for owners encountering this situation. When you run this drill, make sure there is access to cash in the short run should it be necessary.
- Long-term disability: Owners are often disproportionate contributors to their small company’s success. If they lose the ability to work, the whole organization can suffer, from sales to distribution, operations, and customer relationships. What’s the plan to protect against such a scenario? The first step should be to identify who can step into a leadership role for a short time period. But if the disability is long term, how might that impact the company’s value and succession plan? Solutions can include business overhead insurance, policies that offer income replacement or stipulations that enable key employees to buy out the business owner.
- Loss of life: What happens if an owner, business partner, integral employee or investor suddenly passes away? Life insurance funding buy/sell plans and key-person coverage can be an effective tool in these circumstances. However, business valuations are often much higher than people insure them for, and multiple-owner firms don’t adequately protect against loss of life because one of the owners is in poor health. The other business partners are wary about the cost of insuring that person, so they either purchase too little coverage or none at all. The biggest concern that business owners ignore: becoming forced partners with your deceased business partner’s spouse.
- Long-term care: Many baby boomers with substantial business wealth are starting to wonder what will happen if they need significant medical care but what about the elderly parents of business owners? If an owner takes time off from their company to help provide care for an ailing mother or father, the potential disruption to operations and revenue could be significant. Consider where the capital is going to come from to offset the cost of long-term care for family members — you don’t want to be forced to liquidate your business assets.
- Legacy & Legal: What does the business owner envision as their legacy for the next year, 10 years or 100 years? Is it important to an owner that their company last another century? It might be if they preside over a third-generation family business. Various types of trusts, gifts and legal structures help ensure the business won’t be decimated by taxes when ownership is passed to a son or daughter. Contact estate and tax professionals to ensure the documentation is aligned with local laws.
SOURCE: thinkadvisor.com, 5/28/19