Business Life Insurance
Posted on September 21, 2018
by Don Shaughnessy
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Two days ago I talked about life insurance and its two purposes. Protect and create. Yesterday I talked about objective reality. Let’s look at how it goes when a founder passes on.
The protect part
Businesses are fragile. They depend on many factors, some of which are not readily observable. They are like a gasoline engine. Many parts, all of which work together. Must work together. Sometimes a seemingly minor part breaks and the whole thing stops. Life insurance does not recreate the missing part. It just provides money to get after a new one, or fund a new way to make things work again. Let’s look at some of the parts that can suddenly be a problem.
- Credit. The bank relies on the business for their security. More realistically they rely on the people to make it run so their security has value. Particularly the founder. If he is no longer there, their security is less good and they will worry. Worried bankers are a problem.
- Customers and suppliers. Both count on the business being there in much the same form as before. The loss of the founder imperils their future and they look for other business to connect with.
- Employees. The best of them will be looking for their resumes before the funeral is finished. If they do not see all the pieces staying in place, they must be ready to move. A competitor may approach them. Just like the business is the source of wealth for the founder, their job is their source. They will protect it.
- New costs. Dying is not free. There are the immediate costs of funerals, lawyers, accountants, valuation experts and executors. There could be income taxes. Probably will be unless the spouse can run it.
- Value lost. Businesses without management are worth much less than one where there is continuity. If the loss of value is important for the continuing prosperity of the family it is reasonable to replace it.
- Skills and connections lost. Who knows the most about customers suppliers, banks and lawyers? Who understands the machinery and the products? Who knows the next steps? The owner. Who knows the second most? Almost certainly no one person knows. Replacing contacts and networks is a long project. Learning the technical skills is difficult. rebuilding the vision is unlikely.
The replace part
All of the above involves loss. Replacing the things lost involve time and money. You make everything as it was, but if you have the resources and the confidence of the people, you can rebuild. But you must start quickly and you cannot do that without the money resource. Failing the money, time will not work in your favour. Without a rebuild, the business will be sold for whatever it will fetch.
Remember, “estate sale” means bargain.
Life insurance provides a choice and control of the future relies on options like that.
I help business owners, professionals, and others understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.
In previous careers, I have been a partner in a large, international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. email@example.com 705-927-4770