Business Succession/Transition How do you assure that your clients can: Pass a business to their heirs, or, Sell the business when they want, for the price they want

1. Business
Continuation
Education
Overview

2. Two Primary Areas of Focus
“Key-Person” Insurance
• What happens to your client’s business if
something happens to him/her?
• What happens to their business when they
lose an important employee?
Business Succession/Transition
• How do you assure that your clients can:
• Pass a business to their heirs, or,
• Sell the business when they want, for the
price they want

3. “Key-Person” Protection

4. “Key-Person” Protection
Important Stats:
• Every year, more than 2,000,000 employees between
25 and 55 die.
• Risk among any three employees that one will die
before retirement is 54%.

5. “Key-Person” Protection
Important Stats:
• Every year, more than 2,000,000 additional
employees are temporarily or permanently disabled.
• Cancer
• Heart attack
• Stroke
• Other illnesses
• Accidents
• Risk among any three employees that one will
become disabled before retirement is 83%

6. “Key-Person” Protection
Effects of business – costly and disruptive:
Often affects people responsible for a business’s
competitive edge. People with:
• Highly developed skills and proficiencies
• Technical knowledge
• Influential and
valuable connections
• Years of experience

7. “Key-Person” Protection
It is not a matter of just replacing these people:
Their loss can affect:
• A company’s market share and position
• Its credit lines
• Investor confidence
• Employee morale
In a small business,
this can be especially devastating

8. The Solution
With your company executives, estimate:
The cost of replacing each of these people:
• Salary during recovery
• Recruitment, training and
compensation of new employee
• Lost revenue
Cost of coverage:
• Usually averages 2% to 3% of annual salary*
*Dependent of a number of factors

9. Majority of business owners have discussed…
…who would take over if they were to die.
63% have discussed with their business partners who
would run their companies in their absence…
…but only 14% have life
insurance as part of their
business continuation plans.

10. True Story
• Chemical company in Cleveland
• 58 year old president had a heart attack
• Unable to work for almost two years
• Continued paying President – funds weren’t available to
recruit and pay for temporary replacement
• Company promoted VP who wasn’t as capable or experienced
as his former boss
• Made some bad decisions, got company into legal trouble
• Irreparably damaged reputation before original President was
able to return
• Company never recovered

11. It doesn’t have to be the President
• Electrical parts manufacturer in Dallas
• Key accounts manager was killed in auto accident
• Competition immediately contacted all their major accounts
• Took several away
• Company lost millions in revenue that they never got back
No Key-Person insurance to:
• Recruit and hire new
accounts manager
• Compensate for
lost revenue
True Story

12. Business Continuation Planning…
…needs to be part of a business’s short and long-term business
plans to protect:
The Family The Employees
The Investors The Customers

13. Business Succession/Transition

14. Why is Business Continuation
Planning Important?
More than 90% of US companies are family owned.
• More and more, an owner’s retirement plan is inter-
related with other issues:
• Passing down or selling the business
• Training new management
to take over the business
• Estate and gift tax planning
• Cash flow in retirement

15. The Odds Against Successful
Business Succession:
Stats:
• Less than 30% of family owned businesses survive
being passed down to the next generation
• Only 12% make it to the generation after that
Main reasons for failure?
• Incompetence of heirs
• Failure to plan for transition to next generation
• Lack of funds to pay estate taxes

16. Your clients need to understand their goals.
#1 Transfer the Business within the family
• Involves family members
• Who is most likely to continue
its successful operation?
• Sometimes, you have
to hurt people’s feelings

17. What is your goal?
#2 Transfer the Financial Benefits of a successful
business:
• May include:
• Business Partners
• Professional Managers
• Broader base of ownership, or,
• Outright sale to 3rd party(ies)
• Sale proceeds (or income stream) will provide
ongoing financial support for the owner
and/or owner’s family

18. Why a Buy-Sell Agreement?
• With two owners under the age of 50, the
risk that one will die before retirement is
almost 40%
• With two owners under the age of 50, the
risk that one will become disabled before
retirement is almost 70%
• With three or more owners, that statistics
become even higher

19. Why Do I Need a Buy-Sell Agreement?
But here is the real problem:
If one of your business partners dies or
becomes disabled, they, or their family, are
still entitled to their full share of your
company’s growth and
profitability until and
unless you buy out
their share.

20. Why a Buy-Sell Agreement?
Wouldn’t it be better if…
Your partner’s family was able to walk away with
enough money to continue their lifestyle?
Your partner’s spouse
did not become your
new partner?
Your business had a lump
sum of cash to deal with
Replacing your partner?

21. Why a Buy-Sell Agreement?
• Maintains stability of the business
• Creditors less likely to call loans
• Provides security for your family
• Provides funds for retirement / survivor
• Does this when all parties have equal
bargaining power!
• Avoids “fire sale” to third party
• Helps maintain legal status as an S-Corp,
Partnership, or PC

22. The Buy-Sell Agreement includes:
• A Purchase Obligation - provides a guaranteed buyer
• Sets the “triggering” event(s)
• Death
• Disability
• Retirement
• Bankruptcy
• Loss of License
• Value of business (or valuation method)
• When sale will take place (# of months)
• Method of payment

23. The Buy-Sell Agreement Can Accomplish:
Estate Equalization
Treating family members equally
when not all are involved in
business, not all same abilities.
• Heir #1 – involved in business –
inherits business
• Heir #2 – not involved in business –
receives life insurance proceeds
Tax-free death benefit to heir #2 “equalizes” estate
for non-involved children and spouse.

24. Types of Buy-Sell Agreements:
Entity / Equity Purchase Agreement
Cross Purchase Agreement
Trusteed Cross Purchase Agreement
Wait & See Agreement
One-Way Agreement
Option Agreement
(technically not a buy-sell)

25. Funding Buy-Sell Agreements:
Improperly funded Buy-Sell Agreements benefit no one!
Types of Funding
• Sinking Fund
• Loans
• Cash
• Installment sale
• Life Insurance

26. True Story
Family owned business in New Jersey
• Manufactured scents for perfumes
• Owner’s daughter got married
(second marriage for both – in their mid-30s)
• Son-in-law asked to give up successful corporate career to
work in the family business – he did
• Owner died unexpectedly five years later at age 63
• Owner had neglected estate and succession planning
• IRS appraisal forced the family to sell the business to pay
taxes
• Family walked away with nothing.

27. We are available for:
• Complimentary Business
Continuation Workshops
• Educational Seminars
• Meetings with SBDC clients
• Financial Needs Analyses

28. Business
Continuation