5 questions to ask smallbusiness owners about their exit strategies

The use of key person life insurance is a critical aspect of a business continuation plan.

By Perry Goldschein

Exit and key person strategies are critical for the survival and continuation of most small businesses — and never more so than in today’s economy. These strategies also can play a vital role in helping founders derive maximum value from their company.

Yet, getting these strategies right isn’t always easy. In fact, according to the largest online broker site, BizBuySell.com, only between one-fifth and one-third of small firms posted for sale every year are actually sold. Likewise, many business owners are unaware of the options available to them when it comes to mitigating the risk of losing a partner or key employee.

Financial advisors play a valuable role in helping clients understand the details behind their most important financial decisions and then arrive at the best possible choice for them. It’s never too early to begin discussing exit and key person strategies. Here are five critical questions to ask your business owner clients.

1. Do they have a backup plan?

Many business owners figure that when they’re ready to retire, they’ll simply go right ahead and sell their business to a third party. But the reality is often rather different, either because the sale takes a long time or because the sale doesn’t happen at all.

Therefore, in the same way they have a business plan to guide the growth of their company, every small-business owner should have a plan that guides the company to conclusion.

This plan should include a backup option in case a third-party sale isn’t possible, such as passing the business on to a family member or grooming a partner, investor or key employee for a buy-sell agreement.

2. Are they using key person life insurance?

Every small company has at least one employee — the founder — and often others who serve as the bedrock for the company to function. The loss of this key person or employee can have an outsized impact on the business’s performance.

A life insurance policy for owners or key employees means if one of the people covered by the policy leaves due to disability or death or to pursue another career opportunity, those remaining with the company can use the cash value of the plan as liquidity to buy out that person’s share of the business. This mitigates the financial risk and ensures continuity. It also offers an extra incentive for key employees to stay with the company.

What is key person life insurance?

Key person insurance is a type of life insurance policy that provides a death benefit to a business if its owner or another significant employee passes away.

The business owns the policy, pays the premiums and is the beneficiary. If a key person dies, the business then collects a death benefit. That money can be used to help a business replace lost revenue during the search for a replacement.