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Introduction- business continuation workshop

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

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Introduction- business continuation workshop

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Presentation Transcript

  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. True Story 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

  12. Business Continuation Planning… …needs to be part of a business’s short and long-term business plans to protect: The Employees The Family 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 3rdparty(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

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