Insure Wisely to Ensure Your Sale

The hardest part of your sale has been fulfilled – you have a buyer!

Though your confidence in your buyer’s capabilities is high, you didn’t likely get paid in full for your business and attendant real estate; therefore, the purchase price and the lease income will be in jeopardy until the business has been paid in full, the lease terms satisfied, and the real estate purchased.  While you can’t insure against a major economic downturn, major industry dislocation, adverse government policy, or the many other risks outside of our control, you can insure the risks of death or disability of your buyer.

Here’s a real-world case study to give you perspective:

Buyer: Male, Age 42, Non-Tobacco rating
Business Sale Price: $400,000
Ten Year Lease @ $5,000 month equals $600,000

For $300 per month, you can obtain life insurance on your buyer for 20 years (cancelable early if the obligation is satisfied sooner) for $1,000,000.  In the tragic event that your buyer dies, you would be paid $1,000,000 tax free, all the buyer’ obligations satisfied, and his estate inherits a fully paid company.

For $212 per month, you can insure your buyer against becoming disabled and unable to operate the company so that the monthly loan payments would still be paid.  Should your buyer’s disability become permanent, the loan would be paid in full.  (Additional coverage can be obtained to satisfy the lease obligations if so desired).  This is called business loan protection.

When considering the value at risk, these monthly costs are insignificant.  They should become part of your sale agreement, specifying policy owners, beneficiaries, premium payers, coverage amounts, and duration requirements.  Insurance certainly has its technicalities and nuances, but it is not difficult.  Be sure to use an insurance agent that regularly serves the business market (or contact us to discuss your needs).

Here is another insurance tip that might be useful.  Let’s assume that you have a key employee, customer service or production that is not yet your successor, whose loss could really hurt your company, or might even, be terminal.  Again, life insurance can cover your loss by death, but what of a permanent disability?  The solution here is Key Person Replacement coverage.  For this same 42-year-old, for about $140 month, a permanent disability would pay you a $300,000 lump sum after a one-year elimination period.

It is imperative that every business owner have a definitive plan for the future, make progress every day, evaluate the benefits as well as the risks, then do what you are able to reduce those risks. Every business will transition in some form after you.  Do you have the people in place to propel your success today and, even better, continue your legacy tomorrow?

Ensure that your key people are motivated to be career employees, and then insure so that a tragic loss will not escalate into a business tragedy.