What Would Happen to My Online Business if I Died?

This is a guest post by Chris Huntley, a good friend of mine who works in life insurance. We’ve had lunch together quite a few times and we usually discuss topics like blogging and the joy (and challenge) of being parents, but at one particular lunch we started talking about how more and more people are becoming solo entrepreneurs and that because it’s happening so fast, most of those business owners probably don’t have a “business continuation plan” that determines what would happen to their business if they were to die.

Although I have some of the basics in place, this discussion was a big wake up call for me, especially because my online businesses are the primary source of income for my family. After some back and forth, I decided to invite Chris to write a guest post for everyone here to share what we can do and what options are available to us.

This is obviously a very touchy subject, so I apologize to anyone who isn’t very comfortable thinking or talking about death—but I think deep down that we all know that we have to plan ahead, especially when there is family involved.

I also want to mention that yes, Chris is in the life insurance business and does include a link and a phone number in the middle of the article for a life insurance quote, but I assure you that he’s not here for the purpose of generating new leads for his business. He was actually very concerned about including that information here at the risk of looking shady, but I insisted he keep them here because they are convenient if that option is right for you.

I also insisted that I do not earn a commission from any leads generated from this article.

Before I hand it off to Chris, I have to mention that before you make any decisions, please seek the advice of a trusted professional and be sure to talk this out with those who may be involved in and around your business.

Thanks, and take it away Chris…

Business Continuation Essentials for the “Solo Entrepreneur”

Written for the friends of Pat Flynn and the Smart Passive Income community.

When people like Steve Jobs die, we expect large organizations to have a plan for their succession.

Apple did, making the transition from Jobs to Tim Cook as new CEO, seamless.

But what about business owners like Pat Flynn who have no partners or employees? [Editor’s Note, 2019: SPI now has both a partner and employees.]

How can the “solo entrepreneur” plan for business continuation when no one is being groomed to take over the reins?

Great questions.

In this article, we’ll discuss why even a single man (or woman) operation needs a succession plan, and a few practical ways to create one.

Reasons the “Solo Entrepreneur” Needs a Succession Plan

Consider this. What would happen to your business in the event of your unexpected passing or a life altering disability?

Would your spouse or beneficiaries of your estate have any clue what to do with your business?

Would they suffer financially? Do they have the knowledge to:

Take over your business,
Hire someone to take it over,
or sell it for fair market value?

And even if they did possess the know-how, would they want to take over your business? (Perhaps your husband or wife already works at a full-time job!)

For the remainder of this article, we’ll assume that neither of the above is true. Your successor is a spouse or family member who neither has the desire or know-how.

Which leads us to the question, “What can I do as a one-man-operation to plan for the unexpected and make sure my family’s financial future is secure?”

Option 1: The Bare Minimum

At the very least, write your spouse or loved ones a detailed letter about what you’d like them to do with your business upon your passing or disability.

Components of your letter should include:

What you want to happen to your business: Should your heirs sell it, hire someone to run it, or assess and decide when the time comes? My recommendation would be for your successor (see below) to assess your business and, with the input of your family, make the decision together. Working together, your family can instruct the successor about their cash flow needs, and your successor can competently recommend what’s best for your business based on the market at that time.
Name a “Pat Flynn” as your Successor: If you have a competent friend who understands and/or could run your business, ask them if they would be willing to help out your family if something happened to you. This should be a paid job.
Name a Contingent Successor: In case your first choice is no longer willing or able.
Provide essential details about your business: Imagine walking into a friend’s office, sitting down at their desk, and all they have to guide them is this letter. What do they need to run your business? Include:
1. Essential Info for Keeping Your Business Going – Try not to teach them everything you know. Think more along the lines of how to maintain your most important sources of income. Also include key business expenses. (You don’t want your website to disappear because no one renewed your domain name.)
2. Passwords – Computer passwords, website control panel login, etc.
3. Key contacts – Make a list of who they can call for help with any question about your business.

A 10 minute screen capture showing where to find the essential files and programs on your computer would go a long way here.

In my case, I actually have a formal agreement with a partner to buy out my business, but I also took the time to write her a letter. She’s not very computer literate, so for example, here’s a snippet from my letter to her.

Once you’ve written your letter, review it with your loved ones and tell them where they can find a copy. Leave copies for them in multiple locations (in a safe, on your computer, etc.)

Option 1b

If writing a letter is too hard, please at least have a serious conversation with your spouse or loved ones discussing the points above.

Note: If you’re in a highly specialized profession (i.e. attorney, financial planner, sword swallower), have clients, or if your business is built around your personal brand (i.e. magician, sword swallower, public speaker) while some tips here will be helpful for your business, this information is really geared toward those earning affiliate commissions, Adsense income, doing lead generation, and generally following more of the passive income, internet marketing model.

Option 2: Cover the Gap with Life Insurance

No matter how well you plan, it’s unlikely that anyone will run your business as well as you did or sell it for as much as you could have.

If your family depends on a certain level of income from your business that could be reduced upon your death, you should consider life insurance.

Life insurance protects your family from loss of income and other financial hardship by providing a lump sum benefit to the beneficiaries you name upon your passing.

The benefits for life insurance in business continuation are:

Family has access to quick liquid cash – The proceeds are usually paid out within 30 days of a claim being filed.
Buys your family time – With cash in hand, your heirs can take their time deciding what to do with your business and prevents a “fire sale”.
Makes up for Bad Planning – Even if you don’t take my advice from options 1 or 3, your business might still survive your death if your family has sufficient funds to bring in qualified professionals to deal with your business after your death.
Death benefit is *100% income tax free

Please feel free to visit our website for an Instant Life Insurance Quote, or call us at 877-443-9467.

*For non-U.S.-citizens who want U.S. insurance, click here.

One Last Twist of the Arm

Options 1 and 2 are fairly easy to implement. Option 3 is a bit more complex, so before we get there, please let me make one more important point.

The Passive Income Model Raises the Stakes

If you’re building a passive income stream like Pat, you have to realize you’re building a special business. Understand what’s at stake if you let your business die.

Most established businesses are valued at 3 to 5 times EBIT (Earnings Before Interest & Taxes).

Does that apply to us, though, the SPI fans with businesses earning passive earnings?

Here’s a quick example.

I own a life insurance website where I sell leads. While it took me hundreds of hours to set up, now I probably work on it for a total of one hour per month. An article writer on oDesk writes and posts the articles for me, while I sit back and watch it work on auto-pilot.

There’s no way I would let my wife sell that site for 3 to 5 times annual earnings upon my death.

First of all, she probably wouldn’t get fair market value for it (a distressed seller rarely does), but more importantly, I understand that with very little planning, that site could generate income for my family for 10 to 20 years… or more!

Do you want your family to miss out on years and years of passive income because you failed to plan for the unexpected?

Of course not!

Scrutiny from Life Insurance Colleagues

As a life insurance guy, I know that some of my peers will balk at this article.

They’ll say:

“Chris, why not just have the business owner take out a life insurance policy for the value of the business to ensure their families are taken care of?”

I would respond with two main reasons why it’s not that simple:

I prefer my clients get every penny of value out of their business upon their passing, whether they own life insurance or not.
Why pay for life insurance when a few simple steps could be taken to ensure the continuity of the business and avoid the need for insurance?

Option 3: Put on Your Big Boy Pants… We’re Going to Set Up a Trust

The superior option would be to formalize your wishes for your business’ succession, and ensure your desires are adhered to in some sort of legal documentation. After consulting with various attorneys on the subject, I’ve learned multiple ways to accomplish this.

My particular favorite, which I’ll lay out for you, is to “formalize your wishes” by setting up a trust.

“A trust is a document that spells out the rules that you want followed for property held in trust for your beneficiaries.” www.dummies.com

So in a nutshell, you spell out what you want to happen to your business in the trust, and those rules must be precisely followed by the person who you elect. (called the successor trustee)

Here’s one way you could set up the trust:

Have the trust own your business – This applies to you whether you are a sole proprietor, LLC, Corporation, etc.
Name yourself as the trustee – This means while you are living and sane, you call all the shots.
Name your spouse or loved one as successor trustee – This is the person who will make the decisions for the property held in trust (your business) upon your death.
Name a “Pat Flynn” as co-successor trustee (Optional) – If you have a friend who understands and/or could run your business, that’s the person you want in charge of administering your wishes as it pertains to your business. This person would handle the business side of the trust after you’re gone, while the other co-successor trustee would handle the personal stuff.

Note – Just like in Option 1, be sure to ask for your friend’s permission first!

If you don’t have any friends capable of handling this job, and the same goes for your spouse/loved ones, then you might name a professional fiduciary as co-successor trustee.

Fund the Trust with Life Insurance (Optional) – By taking out a small policy on yourself for $50,000 to $100,000, and leaving the trust as beneficiary, the trust would have sufficient funds to pay your co-successor trustee for his or her time. The funds could also be used for your family, if business income decreases while transitioning to a new business manager.

Here’s another reason to set up a trust – If you die without a trust, and have assets totaling more than $100k to $150k (in most states), your estate will have to go through probate, which could be disastrous for a business. *Probate may be avoided if you’re married.

How to Set up a Trust

You’ll have to contact an attorney who specializes in business contracts or estate planning. Sorry. You won’t be able to set up this trust in LegalZoom, since it’s not a plain, cookie cutter trust.

Again, please understand there are many ways to legally formalize your business continuation wishes. My setup above is just one example of how you could do it. Please consult with your own legal counsel for the best setup in your particular circumstance.

Take Action Now

In closing, if you have not done so, please take the necessary steps to ensure your family’s financial future is secure upon your death. Whether it’s a formal action like taking out a life insurance policy or setting up a trust, or simply writing a letter to your loved ones about your wishes, do something, and do it now!

*Huntley Wealth Insurance and its representatives do not give legal or tax advice. Information contained on this page simply reflects our understanding of the tax rules and regulations in effect at the time of publication. Please consult your personal tax and/or legal advisor regarding insurance and/or estate tax law as it applies to you.