Business Succession Planning

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• Business Succession Planning
• Presented
• By
• Diversified Brokerage Specialists

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Planning Your Companys Future

• Could your business survive retirement,
  disability, or death of owner or key employee
  right now?

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Planning Your Companys Future (Cont.)

• Without adequate planning, your business may be
  negatively impacted or forced to close in
  relatively short period of time
• Why? Not because you did something wrong, but
  because you did nothing

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Business Succession Planning

• Crucial step to help ensure successful transfer
  of your company or business interests
• Helps assure that funds will be available to help
  provide maximum financial flexibility in event of
  retirement, death, disability, or other
  separation from business

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Key Person Coverage

• How long would it take to replace your key
  person(s) and how much business does your company
  stand to lose during transition?
• Insurance policy on key persons life, where
  business is owner and beneficiary, may help cover
  cost of transition

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Buy-Sell Planning Agreement

• Written guide to help you through your business
  succession planning
• Can help mitigate conflict and speed up
  transition

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What Is a Buy-Sell Agreement?

• Legally binding contract that can be used with
  all types of businesses
• Agreement must be drafted by attorney
• Stipulates that, at death, retirement,
  disability, or other withdrawal of principal,
  his/her share of business must be sold to
  remaining partners, shareholders, or business
  itself

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What Is a Buy-Sell Agreement? (Cont.)

• Remaining partners, shareholders, or business
  itself must purchase portion of business owned by
  deceased, retired, disabled, or withdrawing
  principal
• Life insurance may be purchased to help fund
  agreement at death or retirement
• Disability Insurance is critical in providing
  funding in the event of a long term disability.

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Key Provisions of a Buy-Sell Agreement

• Buy-Sell Agreement specifies
• Owner will not dispose of his/her ownership
  interest during owners lifetime without first
  offering it for sale to other owners
• Who will be selling and who will be buying
• It is mandatory for seller to sell and for buyer
  to buy

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Key Provisions of a Buy-Sell Agreement (Cont.)

• Buy-Sell Agreement specifies
• Purchase price based upon pre-established formula
  to be used at time of death in order to
  determine definitive price for ownership
  interests
• Which state laws apply
• Changes/termination of agreement
• Process to update coverage should be established
  and valid reasons to terminate agreement should
  be stated

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Business Valuation

• Often, owner has no idea what business is
  actually worth
• Most business owners over- or undervalue their
  businesses by at least 50
• Without proper valuation, owners financial plan
  may not meet owners needs at time of major
  event, such as sale of business, divorce, or
  death of owner
• Regular business valuation can determine current
  market value of business
• Valuation is crucial factor in determining
  individuals net worth and life insurance needs

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Types of Buy-Sell AgreementsCross Purchase

• Calls for each business principal to purchase
  proportionate share of each others interest
  in business
• Each principal purchases a life and a disability
  insurance policy on each of the other business
  principals
• Issues to consider

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Cross Purchase

• Policy Owner
• Beneficiary on Owner Bs Life
• Premium
• Premium
• Policy Owner
• Beneficiary on Owner As Life

Owner A
Life Insurance Policy
Owner B
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Types of Buy-Sell AgreementsStock Redemption

• Business (instead of individual) agrees to
  purchase stock from business principal(s)
• Corporation owns life and disability insurance
  policy on principals
• Issues to consider

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Stock Redemption
Stock Redemption Buy-Sell Agreement

• Stock Redemption
• Buy-Sell Agreement

Business
Premium
Owner A
Owner B
Policy Owner Beneficiary of Policies on Owners
Lives
Life Insurance Policy
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Types of Buy-Sell AgreementsWait-and-See

• Possible solution to changing tax laws, business
  needs, as well as personal issues
• Actual purchaser of deceased principals
  ownership interest and respective amounts not
  determined until death of business principal

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Wait-and-See
Buy-Sell Agreement 1st Option
Buy-Sell Agreement 1st Option
Business
Buy-Sell Agreement 2nd Option
Owner A
Owner B
Or
Premium
Premium
Policy Owner Beneficiary on Owner Bs Life
Policy Owner Beneficiary on Owner As Life
Life Insurance Policy
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Wait-and-See Protecting the Business

• Business has first option to purchase interest
• If business does not exercise option, owners have
  option to purchase interest
• If owners do not exercise option to purchase
  interest, business must purchase interest

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Minimize Risk

• Help protect yourself and your business from
  economic loss and increase likelihood of success
• Reduce risk of loss at death of key person or at
  time of business transfer
• Plan to retain control of business and assure
  funds will be available to provide financial
  flexibility

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Executive Benefit Checklist

• Disability Planning
• Salary continuation planning
• Equalization of disability benefits for highly
  compensated
• Overhead expense protection for owners of smaller
  businesses
• Disability buy and sell plans
• Life Insurance Planning
• Review of personal and business coverage
• Key Person coverage
• Buy Sell
• Deferred compensation
• Estate Planning
• Long Term Care Planning
• Using tax deductible premiums to pay for Long
  Term Care insurance