The Houston Chronicle offered some sage advice in response to a reader question this week. The columnist was Ron Consolino, a management counselor for SCORE, Counselors to America’s Small Business, a volunteer, nonprofit association and a partner of the U.S. Small Business Association.

The question?

An entrepreneur died suddenly after a successful startup. His business could not go on without him. This created a hardship for his family, for investors and for employees. What could have been done to protect their interests?

Entrepreneurs are often too busy developing an idea and building a successful company to consider what would happen to their business if they, a partner or a key employee were to die suddenly.

If they’ve guaranteed a business loan, it’s likely that the lender will call the loan upon the death, leaving the successors without critical working capital.

“A business owner has the obligation to protect the ongoing viability of the business,” according to George Black, SCORE counselor and a former insurance industry advisor.

The best way to reduce this uncertainty is to have life insurance for your business.

“Life insurance can soften the economic blow and provide the necessary cash to stay in business during the transition,” says Black.

It may not be optional. Before making a business loan, many banks will require the business owner to have a life insurance policy.

Life insurance can provide for the successful liquidation of a financial interest in the business, thereby protecting heirs. If employees are scheduled to assume ownership following the death of the owner, the insurance policy can be designed to provide funds for the purchase of the business.

In addition, the life insurance policy can be used to pay federal estate taxes. It also can fund a buy-sell agreement between partners.

If the business is to be sold outright after a death, the policy will provide working capital for the transition. The availability of a ready source of cash will make the business much easier to sell.

Assets are usually discounted during such a sale and the availability of insurance funds will help your heirs.

A related type of insurance is “key person” insurance, which compensates a company for the loss of any other employee who is vital to the business operation. The business has funds to tide it over while the business slows down, and there are funds to search for and compensate the key person’s successor.

For businesses with multiple owners, each partner should have a life insurance policy to facilitate an automatic buyout of the dead partner’s interests.

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