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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CLVL24027 L0614377128[0516]© 2014 METLIFE, INC. PEANUTS © 2014 Peanuts Worldwide
• Not A Deposit • Not FDIC-Insured • Not Insured By Any Federal Government Agency • Not Guaranteed By Any Bank Or Credit Union • May Go Down In Value
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MetLife, its agents and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. Clients should consult with and rely on their own independent legal and tax advisors regarding their particular set of facts and circumstances.
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