Updated: Aug 5, 2020
What’s the “D” word that first comes to mind for your business? Drive? Debts? Distrust? Decisions? All fantastic options and they might be great topics for another day. But today, we are going to get very practical and look at some of the most common D’s.
1) D is for Death
Yes, you have heard it many times that you need life insurance to help cover your family in case something happens to you. But as a business owner, there are many different aspects of death for you to consider. For starters, do you own a business by yourself or do you have partners? If you have partners, and you pass away, do your partners want to be in business with your spouse? If they do not, will they have enough money to buy out your spouse? How will the company be valued at that time with the key employee now out of the picture?
There are many situations to think through, but there’s good news – many of those situations can be solved through a combination of good insurance coverage, and a good buy/sell agreement to spell out what would happen to the company logistically.
2) D is for Disability
The chance that you will get disability is higher than you dying, so you will definitely want to consider how you will move forward if this were to happen. Much like thinking through death, do you have an individual policy that will cover you? Is it a group policy that you can offer all your employees as a benefit? And what will happen to the business’ revenue if you because disabled? If you think the business would suffer, there’s another business policy called a Business Overhead Expense policy that pays out a higher amount for a shorter period of time to cover business expenses.
Again, just like with death, if you have partners, the disability question can become more complicated. If you or your partner(s) became disabled, will they be able to stay on as an owner even if they are no longer able to be productive? Do you have a forced buy-out if they cannot work at a certain level for a period of time? These things are also addressed through a buy/sell agreement and can be funded with a business overhead expense policy so that the company has enough liquid cash to buy them out if necessary.
3) D is for Divorce
Unfortunately, we live in a society where people do not always stay together, especially when a business is involved that someone has been sinking all their time into. It is important to think through how to best protect the business in light of this happening.
I’m not someone who believes in trying to shelter or hide assets, but there are a few ways that may help in the event of a couple splitting up. First, have enough assets outside of the business. Many business owners have all of their net worth wrapped up in their business, so if they go through a divorce the judge will have no choice but to give the spouse a part of the business or force a sale. But if you have a business valued at $2,000,000 and $1,000,000 in investments, your attorney could at least make the argument that it is better for everyone if the business stays in tact and the spouse gets the investments.
If you have partners, the same rules can apply to make sure they have enough liquid assets so the business isn’t forced to sell after their divorce. There are many ways for you to do this – 1) corporate owned life insurance, 2) profit sharing plans, 3) defined benefit plans, or even 4) structuring the business modularly so that a division could be more easily sold and the rest would be held in tact. In addition to this, updating your corporate documents or partnership agreement to address this with an attorney is also a good practice to set guidelines on how the business operates.
4) D is for Downturns
There are going to be downturns, both in life, and in business cycles. When your business has those lows approach, how can you protect it and keep things going? First, just like in your personal life, you should have an emergency fund based on your overhead and operating costs. Three to six months would generally be a good amount to keep in cash and understand working with your accountant how much of that would be taxable if you were to need to withdraw it.
The next thing you can do is keep your fixed expenses lower overall. If you have a lot of employees, giving them annual bonuses with small raises instead of no bonus and large raises can keep your base cost lower. If you sell a product, keeping larger amount of inventory on hand can also help so that your cost of goods sold is lower during times when revenue slows. Last, another way you can weather downturns in the market is by keeping your business modular. If your business consists of 3 synergistic yet independent functions, it is easier to downside one division with the lowest sales and profit margins, as opposed to cutting across the board.
Business ownership can be complicated and having someone in your corner to pose the tough situations and truly understand what you are going through can be instrumental in helping to weather the storms.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Andrew Cremé and not necessarily those of Raymond James. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.