Case Study #2

How can I protect my business and my family if something happens to my partner?

Situation

Our names are Marci and Johanna, and we are in our mid-30s. Six years ago, we created a company that contracts temporary workers for corporate and institutional clients, such as hotels and hospitals. We now have a roster of 40 clients, and a staff of nine, including ourselves. Our company is organized as an S-corporation, and we are 50-50 partners. We think of the company as still in the early growth phase, and we keep reinvesting profits.

Problem

Our BSG professional challenged us to evaluate our respective contributions to the company and then identify vulnerabilities due to the loss of either of us – the “key persons” who drive this business. After discussion, we agreed that our company’s success depends on both of our skill sets. Neither of us is equipped to take over all of the other’s responsibilities immediately in the event of a death or disability.

Our BSG professional asked us two key questions:

  1. If one of us were to die or become disabled, what would it cost to recruit and train a replacement?
  2. Would a 50-50 ownership still operate effectively if one of us were forced to work with the other’s spouse or heirs?

BSG Strategy

The BSG professional helped Marci and Johanna determine that, if either owner were lost due to death or disability, the company would need about $2,500,000 to maintain momentum. About 90% of this amount would be in lost opportunity or revenue, and the remainder would go for salary and benefits to hire a replacement. Using assumptions approved by their CPA, the corporation purchased “key person” life insurance and disability income insurance on both owners.

Realizing that the 50-50-ownership arrangement was not designed to work without both owners’ active involvement, the BSG professional set Marci and Johanna towards implementing a buy-sell agreement, under which either owner agrees to buy out the other’s equity in the event of a death, disability, retirement, or if either one of the partners simply wants out.

The BSG professional facilitated and coordinated this process among a professional team that includes Marci and Johanna’s CPA and a certified valuation firm to value the business. Marci and Johanna’s attorney is now drafting the necessary legal agreements to implement the buy-sell arrangement facilitated by their BSG professional.

© 2012 AXA Advisors, LLC. All rights reserved.
GE-115677b (8/16)(Exp 8/18)

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