Making decisions about anything is typically easier if there is a visual to accompany what you are looking to accomplish. It creates a structure often missing when the description is left to words alone.

It is no different for business owner planning. This visual is the structure we employ at Marshall+Viliesis in each of the four areas of Succession, Retirement, Estate and Key Stakeholder Planning.

Risk Management in Business Owner Protection Planning

We start by defining the objectives and then deciding of the best way to mitigate risk. In order to manage risk it we quantify it.

  • We start by determining what you as a business owner wants. What do you desire? Before you engage an attorney to draft documents you must make some decisions. Many owners get stuck at this early stage. Part of a good planning process gets you the business owner through the hurdles. We define your objectives, help you decide on the approach then we design a plan based what you want. It is our job to give you the framework so you can make the decisions quickly and efficiently. 
  • At the point a plan is clear we work with the Attorney documents the plan and a CPA confirms the soundness of the plan from a tax perspective. This team/partner approach will give you greater confidence. When you are clear as the owner about intent then the documentation is strong. Ambiguity leads to weak documentation and creates problems and unexpected results. 

Legal documents create obligations and now risk management enters the picture. On the left side of the Risk Management graphic are three different forms of self insured risk management. 

  • Sinking Funds/Reserves – This is the simplest form of self insurance. Liquid cash is set aside or readily available to finance an obligation. Sinking funds often tie up cash. Many businesses want as much of their cash to be working capital and not tied up in reserves for self insurance. It will be up to you the owner how much cash you want in reserves for such purposes.
  • Contingent Internal – This is another way to self manage risk. When an event happens it  triggers an action by the company or by someone in the company. A company might have an agreement where the non owner management team will buy out an owner’s interest if the owner is forced to exit the business.
  • Contingent External – In this case there might be an outside solution to managing risk. It could be an agreement with a bank or an understanding with another company willing to come in and take over. This is the most risky of the self insured risk management strategies.

Often it is not feasible nor economically prudent to self insure. Here we look to the right side of the spectrum of risk managment.

  • Insurance products offer a way to mitigate risk and do not tie up a lot of cash. They are also predictable. Even fully insured options have some element of self insurance with deductibles and coverage exclusions.

We look at all risk management options and typically the plan results in a combination of two or more. Keeping this graphic at top of mind makes it easier to understand the options.

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