be more successful and appealing to virtually any suitor. Exploring Your Exit Options There’s nothing inherently wrong with planning a WUID exit plan. You know the one: “Work Until I Drop.” Indeed, for many “type A” personality entrepreneurs, this one is very common, primarily be- cause their business is also their passion. “What would I do with myself if I was not running my business?” Sound familiar? But here’s the catch: None of us knows our “expiration date” (I’ve looked all over my body for one), so avoid the common trap that risks leaving your kids and/or spouse in a financial mess. Let’s be a bit more direct and ask: “What happens if you unexpectedly drop dead or become incapacitated?” So much for your bulletproof WUID exit strategy! Yes, you might be able to just cease operations and liquidate when the time comes, but let’s think about that for a mo- ment! This approach requires navigating and coordinating the various timing issues and related land mines. You’d probably have some vehicle, equipment or building leases. You’d likely then try to sell your inventory, equipment, supplies, tools and any other hard assets. But what’s that stuff really worth, espe- cially under such “fire sale” circumstances, assuming you can even find a buyer? Hav- ing liquidated entire companies, I can sur- mise that you probably have more worthless crap (“one man’s trash is another man’s treasure”) than you are willing to admit and will likely be very disappointed in your sale proceeds. Think garage sales! One other familiar potential exit lane looks like this: “My plan is to sell the business to my kids.” This option is very www.savta.org common, but it begs the question of how and when (also if) you will actually get paid. Do you really believe that your kids will have the money to buy your business? Will they require a source of funding and, if so, will they (and the business) qualify for a loan? Can the business’s cash flow handle debt service for a loan? Will your kids even want to take over your business? You are the one who wanted them to get a good education so they would have attractive career choices! Remember how hard you worked all those years to suppress the business’s profit (on paper) so you could pay less in taxes? Are the kids really qualified to run your business without you, or will they run it into the ground? Statistically speaking, each subsequent generation of owners increases the risk of failure. You could do a hybrid exit model where you gradually back off, working fewer days per week but remaining available to “keep an eye on things and protect your flank.” Here again, your implicit assumption is that you’ll not have been prematurely called back to the mother ship and will be healthy enough to function in a lead- ership or managerial role. Some Sensible Steps to Take Obviously, the younger you are and the more people who depend upon you and your income, the more vulnerable you will be. Even if you have not yet developed a clear exit strategy, there are some things you can do to improve your situation. One step is to have your business buy life insurance on you. It’s common for companies to purchase what’s called “key man” (you can call it “key woman” or “key person”) insurance, and some lenders will insist on such coverage as part of a risk hedge. It’s a bit like a home mortgage lender requiring PMI (private mortgage insurance). Typically, if you have a con- ventional mortgage loan and your down payment is less than the traditional 20% requirement, you’ll need to carry and pay for PMI, at least until you develop adequate equity. This reduces the lender’s risk, and the borrower is paying for it. If you’re the lender, what’s not to like? This reminds me of long ago when I held a mortgage brokers license, which was required when transacting business deals (finance of startups, mergers, ac- quisitions and business recapitalizations) where assets included real estate. Although there’s no such thing as a free lunch, when you’re sufficiently profitable, you can reduce your tax liability and pro- tect your business and loved ones at the same time. Would you rather pay more taxes on your profits or use some of that money to carry insurance? Premiums for key man insurance coverage are a deduct- ible business expense, and the proceeds from such coverage are typically paid to the company upon the demise or incapaci- tation of the insured. Depending on the structure and ownership of the business (and your beneficiaries), this could be a worthwhile consideration, but consider that such coverage may end prior to your death. Alternatively, you could carry and directly pay for personal life insurance coverage, with the proceeds payable to whomever you designate, and this cover- age could prevail at the time of your death. Either way, life insurance can offer protec- tion for those leſt behind, especially if your departure is unexpected and when you are younger. Of course, discuss this with your accountant, attorney and licensed insurance agent. Sure, having life insur- ance is somewhat obvious, but you would March/April 2022 | SAFE & VAULT TECHNOLOGY 9
