Insuring the Future of Your Business
By Erwin G. Krasnow, Esq. and John R. Brooks for RBR.com
Success in publishing and broadcasting can and often does depend on the exceptional contributions of a small number of “key” men or women within the company. These “key” people typically include co-owners, fellow directors and officers, business partners, and key employees. The premature death or long-term disability of one of these people could ultimately threaten a company’s profits or, its very existence.
If, for example, your business partner or key executive dies or is disabled, then the revenues generated by such person may suddenly stop. Moreover, in the event of a death, such person’s ownership interests, unless provided for otherwise, goes to his or her estate. This could create complicated succession and management problems. As another example, if a key employee dies or suffers a long-term disability, then the employee’s key contributions will stop and you will face the immediate need for a replacement.
When evaluating your business in connection with a loan request, your lender may also consider the risk associated with concentration of talent. Perhaps the owner accounts for a significant share of billing and has unique relationships in the market that would be difficult for someone else to replicate. The risk is magnified if that same owner is elderly or has health problems. If the station or publication has a foreign language format and the owner speaks the language, it may be difficult to find a suitable replacement. Perhaps there is an important Editor or on-air talent responsible for the property’s local image. Imagine the disruption to the enterprise if one of these people were suddenly gone.
To reduce these risks, we recommend that you consider “key man” or “key person” life or disability insurance on a key individual to provide what could be a much-needed cash injection to the company if such key person suffers death or disability. Under a key person life insurance policy, the company pays the premiums and the company receives the benefits. In most cases, the lender would want the benefit assigned to them to prepay the loan in the event of a claim under the policy. This is important if there is a disruption to the business when time is needed to find a replacement for the deceased or disabled. In other cases, any proceeds paid under the policy may be used to buy out the deceased’s or disabled’s share in the company, or even help supplement the income of family of the deceased or disabled.
How much key person life insurance should a company buy? The amount required depends on the company’s estimate of the loss the company would suffer if that person stops coming to work, including, as applicable, the cost of a replacement or the cost of buying out that person’s share of the business. A lender wouldn’t require that the entire loan be insured for loss, just enough for a meaningful prepayment. How much is “meaningful?” There is no standard formula. But say the lender is considering a $5 million loan with some “key person” risk. In this case, it may require a $1 million policy, which might be the rough equivalent of at least one year of principal reduction.
It is wise to regard key person insurance policy as a “cost of doing business,” just like insuring against a flooded office or a broadcast tower toppled by a tornado. In particular, in a company with more than one owner who contributes to the operation of the business, a key person policy should be acquired in connection with the buy-sell and/or disability provisions of a shareholders agreement, LLC operating agreement or partnership agreement. In transactions where there is “seller paper,” the buyer might be required to purchase such insurance.
Key person insurance—you may never use it, but when you need it, it’s good to have.
About the Authors:
Erwin G. Krasnow, the co-chair of the Communications Group of Garvey Schubert Barer, is a former General Counsel of the National Association of Broadcasters and the co-authors (with John M. Pelkey and John Wells King) of Profitably Buying and Selling Broadcast Stations. He can be reached at email@example.com and (202) 298-2161.
John R. Brooks is a 25-year broadcast finance veteran, most recently as a Managing Director with Wells Fargo Foothill. He currently works as an independent broadcast consultant and writer. He can be reached at firstname.lastname@example.org and (415) 272-5123.
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