How might the loss of a key employee
affect your business? Will the business survive if a partner becomes disabled or passes? Do you want your legacy
to include a business that survives years
beyond you, or a business that folded
because you didn’t protect yourself against
the loss of a key employee or partner?
“Almost every company’s success depends
on a few key employees and/or partners,”
says Karl Hamilton, senior vice president and
regional manager for SunTrust Investment
Services in Tampa. “A certain employee’s
knowledge is key to the business. One or two
sales people may account for a large percentage of sales. A partner’s heirs may have
no interest in remaining in the business. It is
imperative that business owners consider
these eventualities and put plans in place to
protect themselves and their business.”
Smart Business asked Hamilton for insight
on how business owners can protect themselves should a key employee or partner not
be available to the business for any reason.
What consideration should a business
owner give to protecting themselves
against the loss of a key employee?
While all employees should be, and usually are, important to the success of any business, some are most important or ‘key’ to its
success. The owner should analyze who
those key employees are. What does each
employee bring to the business? What
would happen if this one or that one were
lost? How would that impact the operation?
What would it take to replace that individual? How long and at what cost would it
take to find a replacement employee?
As each employee is analyzed, the cost of
protecting a potential loss is weighed
against the projected cost of the loss if the
person were not available for their job.
Disability and life insurance should be considered. The amount of coverage will be
determined by the analysis.
What additional considerations should be
given to the potential loss of a partner in
the business?
Besides the potential loss to the business because of the partner’s knowledge
and responsibilities, the value of their
share of the company must be considered. If the partner becomes disabled or
dies, family members may want their
share of the business in cash rather than
ongoing ownership.
What is the value of the business? Is
there sufficient cash available to buy the
partner’s share? Most businesses rein-vest their cash into the business rather
than placing it in a restricted fund to buy
out a partner. Insurance may be a good
option to maintaining a large cash
reserve. Without proper planning, it
might be necessary to sell off assets or
the entire business to pay the family.
How are the cash or insurance needs determined?
It is important to do this analysis on a regular basis, especially in situations such as
volatile property values or rapidly increasing sales and profits. It is generally recommended that partnerships consider re-analysis of the value of the business when
the financial results of each business year
are available. Besides profits and potential
profits, current property values should be
determined. Each partner should be covered by cash or insurance to pay off his or
her share on a current basis. In no case
should re-evaluations be made less than
every two years.
How can a business protect against the loss
of a key employee to another business?
Create defined benefit plans and retirement plans that are owned by the business
and not portable. Because many of these
benefit’s costs are based on age at time of
inception, your cost may be much lower
than it would be for another company to
establish equal benefits when trying to hire
a key employee who has been with you for
a number of years.
What are the tax considerations on insurance and retirement plans?
In most cases, the cost of insurance and
most benefit plans are an expense to the
business and are therefore tax deductible.
Be sure to discuss those things with your
CPA to assure they are set up properly.
SunTrust Investment Services, Inc., Sun-Trust Banks, Inc., their affiliates, and the
directors, officers, agents and employees of
SunTrust Investment Services, Inc., Sun-Trust Banks, Inc. and their affiliates are
not permitted to give legal or tax advice.
Clients of SunTrust Investment Services,
Inc., SunTrust Banks, Inc. and their affiliates should consult with their legal and tax
advisor prior to entering into any financial transaction.
Securities and insurance products and
services are not insured by the FDIC or any
other government agency. They are not bank
guaranteed. They may lose value.
Services provided by the following affiliates of SunTrust Banks, Inc.: Securities,
insurance and other investment products
and services are offered by SunTrust Investment Services, Inc., an SEC registered investment adviser and broker/dealer and a
member of the NASD and SIPC. Insurance
products and services are offered by Sun-Trust Insurance Services, Inc., a licensed
insurance agency.
KARL HAMILTON is senior vice president and regional manager of SunTrust Investment Services in Tampa. Reach him at (813)
224-2517 or [email protected].