Business SuccessionPlanning Can your business survive without you?

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Agenda

• Small Businesses in the U.S.

• Planning for When You’re Not Here

• The Buy-Sell Solution

• The Value of Life and Disability Insurance

• How it Works

• Taking the Next Step

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Source: U.S. Dept. of Commerce, Bureau of the Census; Advocacy-funded  research by Kathryn Kobe, 2007 U.S. As posted on www.sba.gov January 2012.

Small Business Effects on the Economy

The estimated 26.8 million small businesses in the United States:

• Create 75% of new jobs

• Employ 50% of the country’s private workforce

• Represent more than 97% of all exporters of goods

• Represent more than 99% of employers

• Generate the majority of innovations (patents) that come from United States companies

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Why Do Small Businesses Fail?

• Improperly plan for growth

• Management of financial statements

• No plan for a succession of ownership

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Source: LIMRA. “Small Business Owners: 2009”

A Closer Look

• 85% of all U.S. firms are small businesses

• Only 25% have formal retirement succession plans

• Only 35% have formal succession plans in the event of death

• The Value of Life and Disability Insurance

• Only 40% with plans use life insurance

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What Will Happen to Your Business?

• When your retire?

• If you become disabled?

• When you pass away?

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Preserving Your Life’s Work

It’s all about…

Control

Choice

Continuity

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A Written Buy-Sell Agreement Contains:

• Who will buy/sell?

• When will the transaction happen?

• At what price will the business be purchased?

• Stated terms of the transaction

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Valuing the Business

• Appraisal

• Stated price

• Formula

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How Will the Buy-Sell be Funded?

• Management or family can borrow the funds

• Your company can save for it

• You can arrange to buy the business interest under an installment basis

• You can acquire life and disability insurance coverage

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Consider Life Insurance

• Provides the cash needed immediately

• Prevents drain on business profits

• Helps to quickly turn a non-liquid asset into a liquid asset

• The policy’s death benefit can be designed to increase over time to reflect the growth of the business1

1 Additional underwriting requirements may apply; no guarantee that insured(s) will qualify for increased death benefit protection.

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Disability Buy-Out Insurance

• Minimizes impact to the bottom line

• Can be used to help replace a portion of the disabled owner’ssalary or purchase his interest

• Disabled partner will likely continue to draw salary or K-1 income

• Can be used to pay overhead and expenses

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Types of Buy-Sell Agreements

Entity Redemption

• The business itself is the buyer

Cross Purchase

• The owners buy from each other directly

• Between two or more owners

Unilateral Buy-Sell

• Between the owner and a key employee or family memberin business

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Which Plan Makes Sense?

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Stock Redemption / Entity Agreement

The income tax-free status of life insurance death benefit proceeds is very valuable. To ensure that the death proceeds of an employer-owned policy can retain this benefit, it is essential to comply with the requirements of Internal Revenue Code Section 101(j).

Owner A

Owner B

Owner C

BusinessEstate ofOwner A

Business Interest

Purchase Price

Insurance Company

Premium Payments

Insurance Proceeds

The Business is the owner and beneficiary of a policy on each owner

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Cross Purchase Agreement

Owner A Owner B

Estate ofOwner A

Premium (On life of B)

A owns and is the beneficiary of a Policy on B

B owns and is the beneficiary of a Policy on A

AGREEMENTLife

Insurance Policy on Owner B

Life Insurance Policy on Owner A

Insurance Company

Premium (On life of A)

Insurance Proceeds (Life of A)

Business Interest

Redemption Price

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Unilateral Purchase Agreement

Protégé

Estate ofOwner A

AGREEMENT

Insurance Company

Premium Payments

Insurance Proceeds (Life of A)

Business Interest

Redemption Price

Life Insurance Policy on Owner B

Life Insurance Policy on Owner A

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Benefits of a Funded Buy-Sell

• Assures the business interest can be purchased at fairmarket value

• Ties key people to the business

• Develops management loyalty

• Helps to ensure competent successor management

• Provides employees with more job security

• Helps open the doors to future financing

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Getting Started

• Define your goals

• Evaluate the alternatives with your financial representative,qualified attorney and accountant.

• Implement the strategy to protect your business

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