Business Succession Planning

Questions I always ask business owners about their current financial protection plan.

Business Continuation

Who are the shareholders in the business and what percentage do they own?

Are there any inactive owners?

If you died today, what would the business status be at death? Continued by heirs? Sold to surviving owners? Sold to Key Persons? Liquidated?

Do you have a written Buy Sell Agreement?

If there is no Buy Sell agreement, how will remaining owners determine how much to pay your heirs?  Will they pay them enough?

If you do have one, what date was your Buy Sell Agreement was last reviewed?

What type of Buy Sell Agreement is it? Cross Purchase Plan? Stock Redemption? Unsure?

What is the approximate value of the business?

How did you come up with thus valuation? (Book Value, Capitalized Earnings, From Attorney or CPA?)

Is the business growing? If so, at what rate?

How do you plan to fund a buyout? (Life Insurance, Sinking Fund, Bank Loan?)

Regarding Key Person Protection & Employee Retention

Who else, other than you, is critical to the operation and proifability of your business?

Do you currently have any protection against the loss of a key employee?

Do you want to retain the key employee(s)? (i.e. through a private bonus, or golden handcuff plan)

If a Key Person dies, would you feel obligated to help provide continued family income with personal life insurance?

Business Debt Protection

How would you repay business debts should you (or one of the other owners) die prematurely?

How much long term debt does the business have? (i.e. Buildings, Land, Heavy Equipment)

How much short term debt does the business have? (Contents of buildings, vehicles, revolving credit line)

Who signed the note at the bank? Owners? Spouses? Business?

Personal Long Term Disability Coverage for Owners

What sources of income will be available to you and your family if you are unable to work due to illness or an accident? What would the impact be on the business?

What is your gross annual income? What is your Spouse's gross annual income?

Any other sources of income? Rentals?

What is your mortgage balance and monthly payment?

How much other personal debt do you have?

Do you plan to pay for your children's education if they decide to go?

Personal Life Insurance Coverage for Owners

Who presently depends on your income? (rule of thumb is at least 10x your income for personal coverage)

Do you have any special needs children?

If you intend to pay for your children's college education, what percent? Will they go to a public or private school?

Do you want to provide continued spousal benefit? If yes, how much income do you want to provide annually?

Do you have any other life insurance? (subtract this amount from your total need that we come up with)

Estate Protection

Have you made any specific plans for conserving and distributing your assets when you die?

Do you have a will?

When was your will prepared?

Do you have a trust in effect?

Do you have any anticipated family inheritances?

What is your estimated net worth?

Which of the following estate planning objectives are most important to you? Avoiding probate, minimizing taxes, equalizing the estate among children, provide for spouses, paying of debt, making charitable gifts, providing for grandchildren, providing college education.

Problem:

Knowledgeable business owners know their business runs several risks for which life insurance is a prudent purchase. These include such things as key person indemnification, debt-protection, stock-purchase funding, and funding for carefully selected employee benefits. Sometimes, meeting these needs creates unnecessary, multiple policy charges and processing fees.

Solution:

Let me audit your existing insurance program or design a new program to make sure your insurance premiums work as hard as possible for you. Sometimes this may only save a modest amount of money, but it will always simplify things for you.

Often, one policy can be designed to do double, triple, or even quadruple duty. One policy can provide key person and debt protection, as well as funding for stock purchase and employee benefits. This simplification and efficiency in premium use can help make sure hard-earned dollars work harder for you.

Here’s an example of “premium shaving” for a business that wants to insure an owner who is a 45-year-old male, at standard non-smoker rating:

# of Polices 4 # of Policies 1
Key Person $100,000
Debt Protection $250,000
Stock Redemption $500,000
Deferred Compensation $150,000
Total Insurance $1,000,000 Total Insurance $1,000,000
Total Premiums $12,562 Total Premium $12,100

 

*Premiums in this post are for illustration purposes only and it provides only general information.

Unfortunately, a lot of people haven't considered the fact that one day they may become disabled. Most will readily admit that contracting cancer, having a stroke, or sustaining a long term disabling injury is a real risk, but all too often those same people say it won't happen to them.

Your income is such a valuable asset, but for many, it is something that is assumed and even taken for granted. When I discuess this exposure with the business owners I serve, I always as the same question:

How long could you go without an income?

Let's assume you have a savings rate of 10% of your annual income per year. Just one year long disability could wipe out 10 years of savings just to support you while you recover! Now what if you couldn't work for 2 years, 5 years, or what if you contract Myasthenia Gravis like my uncle and become bedridden for many years?

Having an income during this painful time, doesn't make the situation better, but it sure does relieve a huge burden for you and those supporting you. And the cost to provide that protection is not nearly as expensive as you might think.

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Here's how long term disability insurance works:

What are the chances of becoming disabled?

  • rovides a smooth transition of control and ownership
  • Avoids ownership by unwanted parties and potential disagreements about business decisions
  • Reassures creditors, suppliers, customers, and employees of the continued viability of the business
  • Helps ensure the legacy of your business

What are some claim examples?

  • Binding on all parties and prevents future negotiations and disputes
  • Locks in a buyer for the business interest
  • Helps ensure your heirs will receive a fair value when they sell
  • Time frames and payment terms are agreed upon ahead of time
  • Helps make sure the active owner(s) retain control of the business

The Insurance That Replaces Your Income

  • Liquid cash is immediately available upon an insured owner's death
  • Tax-deferred growth of cash value
  • Death Benefit is generally received income tax free
  • Disciplined means of setting aside funds
  • Policy cash value can be used toward a lifetime buyout or for financial emergencies

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Everything you need to know about Entity Purchase Buy/Sell Agreements

Have you thought about what would happen to your business after an owner's death or disability? Business owners may not want to be in business with the departing owner's non-active spouse and/or children. Failing to plan for this transition can be the greatest threat to the business's survival.

A buy/sell agreement provides an orderly process for a business to pass from one owner to another. The individuals agree in writing that the business interest will be sold for a negotiated, predetermined price upon the occurrence of certain events including:

  • Death
  • Disability
  • Retirement
  • Divorce
  • Bankruptcy of Owner

How It Works

An Entity Purchase (or Stock Redemption) Buy/Sell is a written agreement between the business (entity) and the owners of a business for the sale and purchase of business interests. This type of agreement is often used when there are multiple owners.

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Here's the steps:

  1. During the owners lifetime an attorney prepares an agreement under which the business will purchase the business interests of owners.
  2. The business buys a life insurance policy on each owner to fund the buy/sell.
  3. In the event that one of the owners die, the business receives the death benefit and uses it to buy deceased owner's business interest from his/her estate.

Benefits of an Entity Purchase Buy/Sell

To the Business

  • Provides a smooth transition of control and ownership
  • Avoids ownership by unwanted parties and potential disagreements about business decisions
  • Reassures creditors, suppliers, customers, and employees of the continued viability of the business
  • Helps ensure the legacy of your business

To the Owners

  • Binding on all parties and prevents future negotiations and disputes
  • Locks in a buyer for the business interest
  • Helps ensure your heirs will receive a fair value when they sell
  • Time frames and payment terms are agreed upon ahead of time
  • Helps make sure the active owner(s) retain control of the business

Benefits of Using Life Insurance to Fund a Buy/Sell Agreement

  • Liquid cash is immediately available upon an insured owner's death
  • Tax-deferred growth of cash value
  • Death Benefit is generally received income tax free
  • Disciplined means of setting aside funds
  • Policy cash value can be used toward a lifetime buyout or for financial emergencies

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What Is A One Way Buy-Sell Agreement?

When people think of Buy-Sell Agreements, they often assume they are only for businesses that have multiple owners. But what happens if you are a business owner that dies and you don't have a partner to buy out your shares from your spouse or kids?

A great solution to this is a One-Way Buy Sell Agreement.

Sometimes there is only one logical buyer for a business--whether that buyer is already indetified or has to be fond. In this situation, it's a given that only one person will be buying out the current owners.

A one way buy sell agreement is a written contract for the sale and purchase of an owner's business interest where only one party has the right and obligation to buy.

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How It Works

  1. The Owner or Multiple Owners enter into an agreement to sell to one buyer and that buyer agrees to purchase the interest of all other owners.
  2. Buyer purchases life insurance on the sellers to fund the plan
  3. when a seller dies, the buyer recieves the life insurance proceeds
  4. Buyer uses life insruance proceeds to purchase the seller's business interest from the seller's estate

Common One-Way Buy/Sell Scenarios

  • Family owns and runs a business.  Everyone agreems that a specific sibling will run the business if either mom or dad passes away.
  • Mulitiple owners of a business--all of whom want to get out of the business, except for one
  • A 100% owner has no family buyer in sight. A buyer is then usually selected from key employees in the business

What Happens if There is No Buy/Sell Agreement?

  1. Close down the business--no value recieved
  2. liquidate the business--a portion of value is recieved
  3. Unqualified family members could take over the business and attempt to run it--unknown probability of success

Whats Are Better Options?

Here's a better option: Sell the business to a competitor, willing and able relative, or key employee and lock in the value with a funded buy/sell agreement--that way your estate will recieve the full value of the business.

What Should I Consider When Looking at Potential Buyers?

  • Experience, Skill, and Ability
  • Time Commitment
  • Existing Employees
  • Existing Management
  • Franchisor Requirements
  • Education and Training Needs

Summary: The Business Owner's Action Plan

  1. Set the value of your business
  2. Determine the appropriate candidate
  3. consult an attorney who specializes in Business Continuation Agreements
  4. Create a formal Buy/Sell Agreement
  5. Fully Insure the value of each owner's interest to guarentee payment

 

Why Work With Aaron Peacock?

I’m am a top producing commercial insurance professional with licenses in property & casualty, workers compensation, life & disability, and group health insurance. I am an Appalachian State University alum currently living in Hickory North Carolina and my  office is located in my alma mater’s city of Boone North Carolina. I am considered an expert in helping business owners with their business succession plans and I insure many firms in the western half of North Carolina. In addition to performing at a very high level in my role as my client’s insurance partner I am also engaged to be married to my fiancé Anna, who is a kindergarten teacher and master chocolate chip cookie baker. I am a volunteer and proud supporter of Appalachian State’s Walker College of Business where I have been asked to speak about relationship marketing & direct sales, personal productivity, career development, and personal finance to the students enrolled in the business school.  In our spare time, Anna and I enjoy walking our dogs Sophie & Bruce, playing yard games and grilling out on our Big Green Egg, riding mountain bikes, and getting out on the water on some stand up paddle boards.

 If you are ready, feel free to request a life insurance quote on this site – here’s the link aaronpeacock.com/free-quote or call me at 828-434-3215 or email me at aaron@aaronpeacock.com. It’s easy, fast, safe and always secure. 

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Why You Should Never Have An Informal Buy-Sell Agreements

Have you ever thought about what would happen to your business after an owner's death or disability? Often times business owners may discuss what they want to happen, but they do not take the necessary steps to lock these plans in. Trying to rely on these discussions after something happens can be one of the greatest threats to your businesses survivial.

How Do Informal Buy-Sell Agreements Work?

During the business owners lifetime, the multiple owners discuss some general terms for a future buyout situation, but do not put anything in writing. Some day in the future, one owner dies. Since prior verbal agreements were informal, all surviving parties must negotiate the terms at the worst possible times to negotiate. If the parties are unable to come to an agreement, then legal intervention is usually required for a resolution.

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What Are The Consequences Of Having An Informal Buy-Sell Agreement?

An Informal Buy-Sell Agreement is a verbal agreement between owners that is not legally binding. Without a formal written agreement, the buyer, price, and terms are all open to negotiation. To complicate the situation, the negotiations may include parties that were never aware of the verbal understanding

An Informal Agreement Is No Agreement At All

A written buy-sell agreement provides an orderly process for passing the business from one owner to another. The individuals agree in writing that the business interest will be sold for a negotiated pre-determined price, upon the occurrence of certain events. These events can include:

  • Death
  • Disability
  • Retirement
  • Divorce
  • Bankruptcy of the Owners

Benefits Of A Written Buy-Sell Agreement

  1. To the Business

    • Provides a smooth transition of control and ownership
    • Helps avoid ownership by unwanted parties
    • Helps avoid potential disagreements about business decisions
    • Reassures creditors, suppliers, customers, and employees of the continued viability of the business
    • Helps ensure the legacy of the business
  2. To the Owners

    • Binding on all parties
    • Locks in a Buyer for the business interest
    • Helps ensure your heirs will receive fair value when they sell
    • time frames and payment terms are agreed upon ahead of time
    • helps make sure the active owners retain control of the business

The Benefits of Using Life Insurance to Fund a Buy-Sell Agreement

I speak about this much more in depth in this post: Life Insurance Funding for Buy-Sell Agreements

Here are the key benefits of using life insurance to fund a buy-sell agreement:

  • cash is immediately available upon an insured owners death
  • tax deferred growth of cash value
  • death benefit is generally received income tax free
  • disciplended means of setting aside funds
  • policy cash can be used for a lifetime buyout or for financial emergencies

 Please take advantage of the risk management  resources I have to offer! If you are ready, feel free to request a life insurance quote on this site – here’s the link aaronpeacock.com/free-quote or call me at 828-434-3215 or email me at aaron@aaronpeacock.com to discuss business succession planning. It’s easy, fast, safe and always secure. 

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Is Your Buy-Sell Agreement Up To Date?

Planning for the transfer of your business interests is an important task. Once a buy-sell agreement is triggered (especially at your death or disability), you or your family are no longer in a position to negotiate the terms of the sale.  To protect your interests and your family, you need to make sure it’s done right.

On the other hand, business transition planning shouldn’t be a one-time event – you can’t sign your buy-sell agreement and just forget about it. Planning is an ongoing process that needs to be updated over time, as your business changes and evolves.

When was the last time you looked at your buy-sell agreement?

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Can you answer “Yes” to the following questions?

  • Are the owners of the business the same as when the buy-sell agreement was originally written?
  • Do you know the current value of the business and is it reflected in your agreement?
  • Does the agreement address all possible reasons for departure from the business, including premature death, disability, and retirement?
  • Will the potential buyer(s) of your interest, whether it’s your co-owners or the business itself, have the funds necessary for the purchase?
  • Do the terms of the agreement ensure that you and/or your family will receive the money from the sale when it’s needed?
  • Has the agreement been reviewed and/or updated within the last five years?

If not, your Buy/Sell Agreement should be reviewed and possibly updated.

Why Work With Aaron Peacock?

I'm am a top producing commercial insurance professional with licenses in property & casualty, workers compensation, life & disability, and group health insurance. I am an Appalachian State University alum currently living in Hickory North Carolina and my  office is located in my alma mater's city of Boone North Carolina. I am considered an expert in helping business owners with their business succession plans and I insure many firms in the western half of North Carolina. In addition to performing at a very high level in my role as my client's insurance partner I am also engaged to be married to my fiancé Anna, who is a kindergarten teacher and master chocolate chip cookie baker. I am a volunteer and proud supporter of Appalachian State's Walker College of Business where I have been asked to speak about relationship marketing & direct sales, personal productivity, career development, and personal finance to the students enrolled in the business school.  In our spare time, Anna and I enjoy walking our dogs Sophie & Bruce, playing yard games and grilling out on our Big Green Egg, riding mountain bikes, and getting out on the water on some stand up paddle boards.

 If you are ready, feel free to request a life insurance quote on this site – here's the link aaronpeacock.com/free-quote or call me at 828-434-3215 or email me at aaron@aaronpeacock.com. It’s easy, fast, safe and always secure. 

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Aaron Peacock

Aaron Peacock

Hi, I'm Aaron and I'm a marketing representative for Federated Mutual Insurance Company - a Ward's Top 50 and an A.M. BEST A+ Superior rated insurance carrier. After my wife was severely injured in an accident involving a distracted driver, I've found one of my passions in life is to help educate people about the Danger of Distracted Driving and have started speaking to businesses in Western North Carolina on implementing the Federated Insurance DriveS.A.F.E. program. Click here to read more...

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