Valuation insider: Life insurance - your final act of leadership?

By Tracey Jeffers Principal, Valuation Consulting ZweigWhite I have found that the A/E/P and environmental consulting industry has many unique qualities, but one I find intriguing when compared with other industries is the longevity of careers at a single firm. ZweigWhite’s 2011 Principals, Partners & Owners Survey reports the median time with a firm is 21 years, and the median time as a principal is 17 years. These stats cause me to summarize that owners, principals, and partners are a group of professionals with a solid commitment not only to the profession but to the firm. So, I find it even more intriguing that a current 32 percent have not secured a very important detail for the long term. Generally, people do not like to think about their own demise and it’s easy to push planning for that event to the back burner, especially when the majority of firm owners (69 percent) are between the ages of 40 and 59. But, as an owner, addressing the issue and seeing to securing the firm’s future is an ultimate expression of love for your company and the future of the people whose livelihood depends upon its existence. The 2011 survey revealed 32 percent of firms do not carry partner or stockholder life insurance on their leadership, a downward trend from 26 percent in 2010 and 2009, and 30 percent in 2008. Having spent the last decade valuing privately held businesses, I have had an opportunity to fully understand the impact the death of a partner can have on a firm, not only from the personal perspective of the loss, but also the loss of business, productivity and financial security. It’s a pretty safe bet that shareholders are also the primary rainmakers and the sudden absence of that revenue will have some long-term ramifications on business operations. For those left behind, the impact also involves the change in ownership when an heir inherits that person’s stock. In many, many cases, the heir will not have an interest in business involvement, but I have talked with firm owners who have no interest in becoming partners with a deceased partner’s spouse. Without the means to remedy the situation with the buyout of those shares through a legal document requirement (the buy-sell agreement) and the money to do so, the business could find itself in jeopardy. Firms with sole ownership of the shares are even more at risk because remaining staff, should they want to continue with the business, may not have the money to buy the firm from an heir nor maintain the working capital necessary to move forward. In my opinion, the partner’s insurance question in the survey should register at 100 percent coverage for every owner. The investment of a few thousand dollars per year may, in the end, secure the continued existence of the business. Considerations to make when buying this type of insurance include:

• What is adequate coverage? The firm should carry enough coverage to fully fund the buyout of stock from the deceased’s estate and provide for additional cash to help right the ship. It is advisable that a valuation of the shares be conducted at the initiation of this process. Thereafter, regular monitoring of share value should be done to ensure that coverage is keeping pace with growth in stock value.
• What happens to the coverage when a partner leaves or retires? A majority of policies are purchased as a permanent life insurance. However, term life insurance may be less expensive and can be bought to cover a partner until he or she leaves or retires. Depending upon the situation, the firm may want to transfer the policy to the departing partner as a benefit.
• Should this be strictly life insurance or should disability also be covered? Considering the age range of the average partner in an A/E/P firm per the survey, disability is as likely if not more so than death. In some cases, disability is a short-term issue, but in others it can be permanent and just as damaging to the business as a partner perishing.

Beyond the owners of stock in your firm, if you have key employees that drive business and the loss would cause instability, insurance should be considered for them as well. From a value perspective, the lack of insurance coverage for owners and key people is a major risk factor that drives discount rates up and values down. This type of coverage is as important as any other and your insurance agent can help to direct you in securing the appropriate policies. If you do not have it, please strongly consider spending the money to get it. It would be a good thing to see the rate of coverage go up in our 2012 survey!