One unique quality of the architecture, engineering, planning (A/E/P) and environmental consulting industry 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 confirm that owners, principals, and partners have a solid commitment not only to the profession but also to the firm. So, I find it intriguing that a current 32 percent have not secured a very important detail to take care of the long term.
People in general 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 securing the firm's future is an ultimate expression of love for your company and the future of the people whose livelihood depends on its existence.
Having spent many years valuing privately held businesses, I fully understand the impact that the death of a partner can have on a firm from not only the personal perspective 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. Without the means to remedy the situation with the buyout of those shares through a buy-sell agreement, the business could find itself in jeopardy. Those firms with sole ownership of the shares are even more at risk because remaining staff may not have the money to buy the firm from an heir nor maintain the working capital necessary to move forward.
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, regularly monitor share value 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.
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, disability is as likely, if not more so, than death.
Beyond the owners of stock in your firm, if you have key employees that drive business and the loss would cause instability, key person insurance should be considered for them, as well.
From a value perspective, the lack of insurance coverage on 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.
Tracey D. Jeffers, MBA, CBA, CMEA, is a senior consultant in ZweigWhite's Financial Advisory Services Group where she oversees valuation services. Contact her at email@example.com or 479-582-5700.