What is your Business Worth?
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Are you a Principal with an established business? How many partners at your firm? Do you or your partners know what your business is worth? Wardbrokerage.com
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What is your Business Worth?
- 1. Buy-Sell Agreements Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 2. Special Issues & Problems of Business Owners • Repayment of Business Debts • Protecting Business Operations & Continuity of Management & Ownership Without Interruption or Interference from “Outsiders” • Eliminating Potential Disagreements Between Family & Business Associates • Avoiding Forced Liquidation of Business or Assets • Providing Lifetime Financial Security & Adequate Retirement Income • Dividing Estate Equitably Among Heirs Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 3. Death & Disability-“Real World” • Disability • Status Quo: “Self-Insured” - other owners do all the work for some of the profit. How long? • Sell Interest - Who will buy it? Will it work? • Death • Sole Proprietorship: business inherited by family or sold • Partnership & LLC: mandatory dissolution (legal termination) & reformation or liquidation (financial termination) • Corporation: “myths” of perpetual existence and free transferability Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 4. The Need for Business Continuation Planning • Creates Guaranteed Market for Business Interest • Establishes Fair Price & Terms of Payment in Advance • Provides Funds for Payment & Protects Interests of Both Heirs & Business Associates • Assures Continuity of Management & Ownership • Improves Relations with Business Creditors • Enhances Estate Liquidity Business Owners Never Plan to Fail . . . But They Often Fail to Plan. The Solution: Insured Buy-Sell Agreement Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 5. Types of Buy-Sell Agreements • Entity Buy-Sell Agreement • Corporation - Stock Redemption Plan • Cross-Purchase Buy-Sell Agreement • Administration by Trust • Administration by General Partnership • “Wait & See” Buy-Sell Agreement Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 6. BUSINESS BUY-SELL AGREEMENT OWNER A OWNER B INSURANCE COMPANY POLICY ON OWNER A POLICY ON OWNER B BUSINESS OWNER A OR ESTATE OWNER B 100% 0WNER 1 2 3 4 5 Entity Buy-Sell Agreement 1. Entity executes agreement with owners. 2. Entity is owner & beneficiary of policies on owners & business pays premiums. 3. Death of Owner A - policy proceeds paid to business entity. 4. Owner A’s estate sells business interest to business entity. 5. Owner B is sole owner of business.Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 7. Advantages of Entity Plan • Simple • Number of Insurance Policies Is Minimized • Premiums Paid by Business • Business Control Over Policies • Corporations • Policy Values Are Balance Sheet Asset • No Issue of “Reasonable Compensation” or “Constructive Dividends” Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 8. Cross-Purchase Buy-Sell Agreement BUSINESS OWNER A OWNER BBUY-SELL AGREEMENT POLICY ON OWNER B POLICY ON OWNER A OWNER B 100% OWNER OWNER A OR ESTATE INSURANCE COMPANY 33 22 4 5 1 1 1. Owners execute buy-sell agreement. 2. Each Owner is owner/beneficiary of policy on other Owner(s). 3. Business pays premiums with bonus or split-dollar plan. 4. Death of Owner A - policy proceeds paid to Owner B. 5. Owner B buys business interest from Owner A’s estate.Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 9. Advantages of Cross-Purchase Plan • Policy Cash Values & Proceeds Not Subject to Claims of Business Creditors • Full Increase in Cost Basis for Remaining Owners • C Corps • No AMT on Policy Cash Values or Death Proceeds • No Attribution Rules Regarding Stock Ownership Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 10. First Option Second Option BUSINESS BUY-SELL AGREEMENT OWNER A OWNER B POLICY ON OWNER B OWNER B 100% OWNER POLICY ON OWNER A OWNER A OR ESTATE OWNER A OR ESTATE OWNER B 100% OWNER BUSINESS INSURANCE COMPANY 22 3 4 1 11 56 “Wait & See” Buy-Sell Agreement 1. Entity & owners execute agreement. 2. Each Owner is owner/beneficiary of policy on other Owner(s) - premiums paid with bonus or split-dollar. 3. Death of Owner A - policy proceeds paid to Owner B. 4. Owner B has option to buy business interest from Owner A’s estate, OR . . . 5. Owner B pays policy proceeds to business as capital or loan, and . . . 6. Business buys interest from Owner A’s estate. Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 11. Advantages of Wait & See Plan • Flexibility in Structuring Buy-Out • Increased Cost Basis for Remaining Owners • Policy Cash Value & Proceeds Not Subject to Claims of Business Creditors • C Corporation • No AMT on Cash Value or Death Proceeds • No Attribution Rules Regarding Stock Ownership Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 12. Partnership & LLC Buy-Sell Planning • Entity Plan • Premiums & Tax Allocated Based on Business Ownership - Special Allocation Possible with General Partnership • Partial Increase in Cost Basis for Remaining Owners • Cross-Purchase Plan • Premiums & Tax Allocated Based on Policy Ownership & Underwriting Class • Full Increase in Cost Basis for Remaining Owners • Wait & See Plan Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 13. S Corporation Buy-Sell Planning • Legal restrictions on stock ownership • One Class of Stock - 100 Shareholders • Individual, Estate (2 Years), QSST, ESBT, certain charitable organizations and certain qualified plans • Entity Plan • Premiums & Tax Allocated Based on Business Ownership • Partial Increase in Cost Basis for Remaining Owners • Cross-Purchase Plan • Premiums & Tax Allocated Based on Policy Ownership & Underwriting Class • Full Increase in Cost Basis for Remaining Owners • Wait & See Plan Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 14. C Corporation Buy-Sell Planning • Redemption Plan • Legal Restrictions on Redemption of Stock • No Increase in Cost Basis of Remaining Owners • AMT on Cash Value & Death Proceeds • Attribution Rules on Stock Ownership • Policy Cash Value & Proceeds May Be Subject to Claims of Corporate Creditors • Cross-Purchase Plan • Trust or Partnership Administration • Split-Dollar Plan for Insurance Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 15. Funding Alternatives Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 16. Funding Alternatives • Cash - Improbable • Insufficient Amount - Cash Reinvested in Business • Sinking Fund - Uncertain • Premature Death • Investment Results Unpredictable • Tax Issues • Credit - Expensive • Credit Risk After Death of Owner • Payment of Principal & Interest • Installment Note - Uncertain & Expensive • “Private” Loan • Dependent on Future Cash Flow & Assets Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 17. Funding with Life Insurance • Cost-Effective • Tax-Advantaged • Amount of Cash Guaranteed & Known in Advance • Cost Paid in Advance When All Owners Are Active & Business Is Fully Operational & Profitable • Immediate Payment - Event That Creates Need Creates Cash • No Forced Sale of Business Assets • Cash Flow & Capital Unencumbered Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 18. Cost Comparison Sinking Fund Accumulate $1 Million Annual Deposits for 10 Years Investment Return 8% Net After-Tax Credit or Installment Note Principal of $1 Million Annual Payments for 10 Years Interest 8% Per Annum Life Insurance $1 Million Life & Disability Buy-Out M - 45 - NS - Standard Rates 10 Years Premiums - 8% Rate of Return (Life Insurance) Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
- 19. Cost Comparison 10-YEAR ANNUAL COST TOTAL COST Sinking Fund $ 63,918 $ 639,180 Loan/Installment Note $ 149,029 $ 1,490,290 Life & Disability Insurance $ 21,813 $ 218,130 Ward Brokerage Associates 60 Avon Meadow Lane Avon, CT (860) 761 3775 info@wardbrokerage.com wardbrokerage.com
Editor's Notes
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- What really happens if a business owner becomes disabled or dies? In the case of disability in a business with more than one owner, many people simply assume that it will be “business as usual” with the other owners continuing to run the business until the disabled owner is able to return to work. But how long will disability last? How long will the other owners be willing to do all the work for only some of the profits? Alternatively, what if the disabled owner decides to sell his interest in the business? Who will buy a minority interest in a family-owned business? What is the purchase price? Will the new owner be acceptable to the current owners? What are the consequences of an owner’s death? In the case of a sole-proprietorship, the business is either inherited and run by the heirs, or it is liquidated and sold. Will the owner’s family run the business or just run it into the ground? If the business is sold, will it be a forced liquidation for “bargain basement” prices? In the case of partnerships and limited liability companies, state law mandates dissolution (which is a legal termination of the business entity) and an accounting, followed by either the restructuring of the business entity among owners, associates, and/or heirs, or the liquidation of the business (which is the financial termination of the business entity). Theoretically, corporations have the legal characteristics of “perpetual existence” and “free transferability of interests”, so in the event of the death of a shareholder, there is no mandatory dissolution, restructuring, or liquidation of the business. Therefore, the deceased shareholder’s business interest can be inherited and retained by heirs, or sold to business associates or “outsiders”. However, from a practical standpoint, the issues faced by closely-held corporations are identical to other business entities – corporations don’t run themselves. Who will buy a non-controlling interest in a closely-owned business? What is the purchase price? Will the new shareholder be acceptable to the current shareholders? All these issues must be considered and addressed . . . what are some potential solutions?
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