Last month we discussed six common mistakes that business owners make and their potentially devastating consequences for those companies. This month we’ll go a step further and let readers examine their own risk level for each of these mistakes. The first mistake involves not knowing what your business is worth.
Answer the following questions to see if your company is vulnerable:
• Has the business value been appraised by an outside expert?
• If so, has the appraisal been reviewed within the past three years?
• Is there a written buy-sell agreement?
• Is the buy-sell agreement funded through insurance or adequate cash reserves?
• Does the buy-sell agreement protect the business owner’s family and co-owners?
• Has the buy-sell agreement been reviewed within the past three years?
• Is the signed buy-sell agreement readily locatable?
The more “no” answers, the greater the risk. How does your company look?
If you don’t have a buy-sell agreement, you’re not prepared to deal with an owner who wants (or needs) to sell his or her stake in the business. A buy-sell agreement sets the ground rules for how that ownership stake can be sold or transferred and specifies how it will be valued.
Most companies with buy-sell agreements choose life insurance as a cost-effective funding mechanism to deal with the unexpected death of an owner, but insurance won’t help when an owner retires or simply wants to sell and move on. Although companies rarely fund 100 percent of future obligations in advance, it may be wise to consider setting aside money each year to help offset the financial burden of cashing out an owner at retirement. Either way, it’s critical to know the true market value of the company to ensure that enough funds are available to buy out an owner’s share of the company, especially if the buyout comes at an unexpected or inconvenient time.
Business Killers is an innovative educational program for executives and business owners put on by my friends Mark Baker and Lisa Brumm of AXA Advisors. For more information, contact Mark at firstname.lastname@example.org or Lisa at email@example.com