Business Succession Planning and Insurance

As your business increases after years of operation, you find yourself in a position to consider what the next generation operation will look like. This involves management, labor, and ownership. What will the next chapter look like? We will review and discuss what the future involves in terms of business succession planning and insurance. In this segment, we will discuss what takes place in the daily events of the business. This applies to the family farm as well as any family business.

Business Succession Planning and Insurance, Part 1: Ownership Organization

The key thought is what succession may look like and what are the key steps. Typically, the business has been operating for years at a profitable level. As the next generation of owners or partners becomes involved with daily decisions and activities, the roles are more intricate and have increased value. These issues can create stress and unforeseen circumstances that are critical and need in-depth discussion.

1. Pay Attention to Who is Listed as Named Insured on the Policy

First, who is listed as named insured on the policy is very important. This individual or individuals are typically the owner of the real estate and/or business equipment that the policy is covering. Named insureds can be individuals, partnerships, LLCs, or corporations. Oftentimes during the succession planning process, partnerships or LLCs are formed among generations.

The ownership may include real estate and/or equipment and livestock. For example, it may go from the parents having complete ownership to only owning the real estate while the LLC becomes the owner of the business operation with the equipment and livestock.

It is important to make sure that any individual and entities with ownership are listed as a named insured on the policy. You can see who is listed as a named insured on your current insurance policy DEC page.

2. Be Aware of Liability Changes

Next, as ownership of the business changes, family members and/or employees can go from being viewed as pure employees to having ownership in the business. Once an individual picks up ownership, they become additionally liable for the activities and products of the business.

For example, if a pure employee leaves the gate open and a cow gets out onto the road and causes an accident, the employee is not liable for the situation. The claim would fall on the owners of the business.

The same goes for product liability. Employees would not be held liable for a batch of bad eggs; the owner would be. Once ownership is transferred or expanded, keep in mind how the liability is transferred as well.

3. Make Sure You Are Aware of Who Workers Comp Does or Does Not Cover

Another item to keep in mind when an employee becomes an owner is Workers Compensation. Once an employee becomes an owner, workers compensation coverage will most likely not apply to them as the owner.

Medical coverage for owners would come from their health insurance. If there is concern about a situation where they would be unable to work for a period of time due to an injury, disability insurance would be the source of compensation if the policy exists.

4. Ensure You Have Enough Liability Coverage

There are many consequences of being underinsured during an ownership transfer. Making sure that all new entities or individuals are listed on the policy is very important so they will receive coverage for liability claims. With today’s real estate values, it is pertinent to make sure that the liability values “match” the value of the business.

Most policies have a maximum liability coverage limit of $1,000,000, but often that is not enough to match the value of the property, the size of the operation, or the business assets. This is where a Business Umbrella Liability Policy becomes valuable. It is important to consider the value of the real estate and the exposure of the risk relating to business equipment. Umbrella policies can be purchased in increments of 1 million dollars.

An Umbrella can not only cover the business and personal liability, but can cover auto liability as well. This is critical to consider when young drivers are involved as the likelihood of accidents involving youthful drivers is high. These are just some reasons why you need umbrella liability insurance.

Business Succession Planning and Insurance, Part 2: Looking in Next Generations

As you have moved the business along with the family members or with key employees, time is now approaching the point when it is important to consider who is the next owner. In situations where we are looking at multiple family members, it is often important to keep in mind what is considered equitable with those involved.

This is succession planning as it relates to families with multiple children and things to keep in mind when one child will take over the ownership of the business and the remaining siblings will want to be compensated on the value of the business from an inheritance perspective. We will discuss those items that raise questions and discussions.

Who Are the Family Members Involved?

To begin, who is involved? We are looking at the family members when first answering this question. These individuals may be part of one family or multiple families depending on the size of the business.

It may be just “dad and mom” on the family farm, or it may be ”brothers”, “sisters”, or combinations of “siblings” that own and operate the operation which now spreads the interest into multiple families.

The issue is where the ownership rests, who are the owners, is the plan split up, and what determines the cash flow and profits from the operations.

Business Succession Planning For Single-Family Operations

Here are some specific considerations when it comes to business succession planning within one family.

1. How is the Property Being Passed on?

First, if a family owns the business, and the next generation is ready to take the business, which members of the next generation will be the ones with future ownership? You will need to be sure how the property is being passed on.

2. Are Values Getting Adjusted Appropriately?

The current “fair market values” are showing increased pricing. With the high value of real estate, are values being adjusted to make them more possible for ownership with the next generations?

If that is the situation, then you must be aware of whether equity or dollar values shared with other family members are matching appropriately. This must be discussed with full and open conversation by family members. Third parties, including lawyers and accountants, are important persons to help in these situations.

Business Succession Planning For Multi-Family Operations

The second situation may be that of the larger multi-family farm or business. In these circumstances, you have different scenarios.

1. Is the Property Being Passed on? If So, How and to Who?

It may be the case where one of the owners has no one in the next generation that is interested and hence they are interested in turning their ownership into the best value in cash. Or, if the next generations are the new owners/operators, then these are the biggest and most excitable opportunities.

However, keep in mind if there are increased numbers of owners from previous generations. Their ideas can cause stress. This again is a subject to be discussed with all parties involved with advice from the legal entity.

2. Is There a Partnership or Entity Involved?

A third environment is one that is becoming more visible in the business communities. Many real estate entities become part of an entity owned by a partnership of the members of the family.

There are multiple ways to configure this organization and there are multiple outcomes on how they may be used. Make sure that the members of the group understand how their method works and are agreeable.

Get the Assistance and Insurance Coverage You Need During Estate Planning

This is just a start of what you need to keep in mind when it comes to business succession planning and insurance. There are several ways that real estate entities in the family or business can change with ownership. It is seldom that it is simple and easily worked out.

Begin these conversations much earlier than you think is necessary. There are many different subjects that need to be discussed and often you will see different perspectives from those involved. Be calm and open to hearing all individuals who are part of the future. You want your family, business partners, and friends to be congenial.

If you would like to talk in more detail regarding estate planning, please contact our agency at 800-537-6880 or 717-665-2283. You may also email us at Our professional staff will be ready to have a knowledgeable conversation with you.

Disclaimer: Information and claims presented in this content are meant for informative, illustrative purposes and should not be considered legally binding.