It is not unusual for a business owner to indicate that he or she is interested in leaving the business to a key employee or someone else who is not a current owner of the business. Even if the owner names someone else as the successor - like a family member or co-owner - retaining a key employee that knows the business inside and out may be imperative to the successful transition of the business from the owner to the appointed successor.
To help with the successful transition of the owner's business in these scenarios, consider the following opportunities:
KEY PERSON OR NON-OWNER AS SUCCESSOR
One-way buy sell
A one-way buy-sell arrangement is a succession planning solution in which a key employee (or multiple key employees) agrees to buy the business in the event of the owner's death, disability or retirement. Unlike other buy-sell agreements, the obligation to buy the business falls squarely on the key employee and the owner has no reciprocal responsibilities. As with other buy-sell agreements, life insurance is typically used as the funding source to meet the purchase obligations of the business from the deceased owner's estate.
Employee Stock Ownership Plan (ESOP)
An ESOP is a special type of qualified retirement plan (like a profit sharing plan) created for the benefit of the company's employees that invests primarily in the stock of the employer/company. An ESOP is most commonly used to provide a ready market for the shares of a closely held corporation when a business owner is ready to depart. If a corporate owner does not have a family member, co-owner, or outside buyer interested in taking over the business, or would like to see the ownership of the business transition to the employees, an ESOP can be an effective way to create a source of funds to purchase the owner's interest in the company.
KEY PERSON IMPERATIVE TO CONTINUED SUCCESS OF THE BUSINESS AFTER TRANSITION
Key person insurance on the business owner
In many small businesses, key employees often are as critical to the continued success of a business as the business owner. These individuals have often been with the company from the beginning , know the ins and outs of the business, and may be responsible for maintaining relationships with clients, customers, vendors, etc. Upon the death of the business owner to whom these key employees are loyal, these individuals may decide to seek opportunity with a competitor (or start a competing business) rather than stay through the transition of the business to a new (and possibly unknown) owner. With that in mind, a key person policy on the life of the business owner would be one way to infuse the business with liquidity that could be used to provide a lucrative incentive to keep these employees involved in the business, at least for a period of time, so that the business can transition without skipping a beat.
