TIPS ON EXIT PLANNING
by RON MCCLISTER, IPSCO
business owners have an exit plan, leaving a vast majority of busi- ness owners without a plan to leave their businesses. Moreover, of those who currently have a plan in place, very few have a funded buy-sell plan with life insurance, and even less have funded a buy- sell plan with disability buy-out insurance. Exit planning includes formal agreements established by
B
and between business owners, family members, key employees or other third parties to help provide for the continuation or sale of the business. T ese include:
• Death buy-sell—T is agreement establishes a predetermined business price and a buyer for the business interest when a partner or owner dies. Life insurance is commonly used to help provide the funding needed for the buy-sell agreement.
• Disability buy-sell—T is agreement establishes a prede- termined business price and a buyer for the business inter- est when a partner becomes disabled.
• Retirement exit planning—Exit planning helps business owners set exit goals and helps maximize fi nancial return when the business is transferred and may help minimize the tax liability.
COMPLIMENTARY BUSINESS VALUATION Insurance Planning & Service Company, LLC (IPSCO)
off ers a complimentary service for Memphis Bar Association members through one of our prime carriers to perform an in- formal business valuation and/or buy-sell review. T ese ser- vices provide you with:
• A complimentary informal business valuation using fi ve commonly used valuation methods.
• A summary of any issues and recommendations regarding an existing buy-sell agreement (if applicable).
T e reports from these services provides a starting point
for discussions with your tax and legal advisors either to ad- dress potential concerns or confi rm that your agreement is up- to-date and meets your current objectives. For more information, visit
www.ipscolawyers.com or contact the Memphis offi ce at 901.761.2440.
8
usiness owners usually have the best of intentions when tak- ing measures to assure the continuation of a business if an owner dies or becomes disabled. Yet, only one-quarter of
Eight common buy-sell agreement pitfalls to avoid in order to assure the continuation of a business if an owner dies or be- comes disabled:
1. T e buy-sell agreement only addresses the death and not disability of an owner.
2. T e agreement addresses disability, but the buy-out clause is not properly funded with disability buy-out (DBO) in- surance or other funding source.
3. T e owners have DBO insurance, but the amount of cov- erage is insuffi cient.
4. T e language of the agreement does not match the DBO insurance policy in terms of:
• Disability defi nition • Waiting period length • Payout terms
5. T e agreement does not have a schedule or exhibit listing DBO insurance policies.
6. T e agreement uses book value as the buy-out price. Un- fortunately, book value rarely represents the going-concern value of a profi table company.
7. T e agreement uses a stipulated buy-sell price that has not been updated in years.
8. T e agreement does not stipulate a mandatory buy-out in the event of an owner’s disability. Without a mandatory purchase obligation by the company or other owners, a disabled owner may not have a buyer for his or her shares.
When business owners do plan to sell their businesses, their
asking prices might not refl ect actual market value. Business valuations need to be updated over time since about half plan to retire at least fi ve years from now. T at time frame may allow them to work through the challenges of the recent economic recession, help them to grow their businesses and improve their personal fi nancial situations. t
ABOUT THE AUTHOR Ron McClister, CLU, ChPC, is Manager, Life & Health Department, In- surance Planning & Service Company, LLC.
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28