Many small businesses overlook the needs of their owners and employees. The business continuity is a critical need for all involved: partners, stockholders, owners and their families.
If you are a producer who is knowledgeable about business insurance, or want to help prospects who might be affected by it, it’s a great way for you to get to know your prospect. Ask the prospect what they would like to see happen to the company when he or she dies. There are three main options.
1. It is yours to keep. It can be sold.
3. Liquidate it.
Producors can discuss each option with prospects by asking the right questions.
Producer: “One possibility is to keep it in the family. Is this possible?
Another option is to sell your business as a going concern. Do you wish to sell your shares of the business and let the owners buy your family members out?
The third option is to close down the business and cash out the assets. What does that sound like to you?
The producer may skip certain questions depending on what type of business is involved.
Each option has its own set of issues. The producer may explore the possibility of a family member retaining the business if the owner wishes.
What family members would you prefer to have a share in the business?
Who would manage the business in your area on a daily basis?
Have you spoken to the person about it? Is he ready and able to manage the business?
Are you and your heirs compatible?
Are your creditors aware of your plans? Have they agreed to keep their business credit accounts with another person?
What annual loss or profit do you expect to make in the next five-years?
Do you think it would be a good idea to guarantee the profits of your family? If so, how long?
Is your death likely to result in other outstanding monetary requirements?
The producer can ask these questions if the prospect wants to sell the company.
Who would you like to sell your shares? Do they want to buy?
What would the price range and payment terms look like?
How will it be funded
Is the buyout legally binding?
If the prospect wishes to liquidate the company and sell its assets, the producer must ask the following questions:
How much would the business be worth today?
What would the company lose in a forced sale versus what it would have made as a going firm?
Are there any other business-related loans? Are you deciding whether to leave them to your heirs, or if you would like to get rid of them all at your death.
What arrangements have been made to ensure that your goals are achieved?
“What do your dreams for your business after you retire or die?” This is a great question to get started. This question can be used by the producer to make cold calls, talk with existing clients with a business, and meet with business clients with insurance but not life insurance.
These questions address the three options for business owners in the event of their death, but the choice they make can cause additional problems for their loved ones and their business partners.
This is a common market opportunity. Owners must protect their business stakes. Small business owners are quick to recognize the importance of providing cash for the business in case something unexpected happens to a partner. This concept is not well-known by producers. If they fail to take it to the next level, they will miss out on a great opportunity to increase sales.
A buy-sell agreement is an effective solution to these problems. You can choose to buy-sell an agreement either cross purchase or entity purchase.
In both cases, when a business partner dies, the remaining partners receive a greater share of the business. Although the buy-sell agreement is a positive for business continuity, it can cause significant estate tax problems for the surviving owner.
If the buy-sell plan is completed to its end, the entire business’s value will be transferred to the estate of the last remaining owner.
Let’s take an example: a two-owner wholesale plumber business.
Each owner had invested $12,000. Each owner invested $12,000.
Today, the business is worth $2.15million, has 39 employees, and enjoys a great reputation. Both parents have children. Owner One is the father of three daughters. None of them are active in the business. Owner Two has two sons. One of them is actively involved in the business.
The owners signed an entity purchase-buy-sell agreement as the business grew. The business currently insures each owner for $1.1million. They have also kept their insurance up-to-date. The business will buy the share of the deceased owner and retire the stock. This leaves the sole owner of the company, the surviving owner.
This scenario is one where planning is important, but the first person to die can avoid severe estate tax consequences.
However, the survivor will not have such a lucky ending. Survivor will be the sole owner of the business, which means his net worth will exceed $2.15million, which almost guarantees substantial estate taxation.
What should an owner plan? One of them will be left behind if they only plan for their shares of the business. Each must plan as though they are the survivor. This creates opportunities for insurance sales. Producers should make statements that lead to sales.
Producer: “Owner One, Owner Two, this buy-sell agreement is an important step to protect yourself, your families and each other. This is something every business owner should do and I am glad that I was able to help you make it happen.
“There’s one more thing I need to discuss with you all. This is what will happen to the estate of the survivor. Actually, I think we should have a conversation about your personal estate planning. And what will happen to you if you’re the survivor.
Both owners must do some estate planning so that estate taxes are not increased beyond what is necessary.
What options does the survivor have then?
The business can be sold, but that creates its own problems. This will result in capital gains tax on the $2.15million gain in the business, and the remainder will be left in the estate of the survivor.
Their capital gains tax problem could be improved if the buy-sell agreement was a cross-purchase rather than an entity-purchase plan. However, a substantial amount of tax would still be due upon the sale of their business. The estate tax problem is not solved by selling the business. It simply transfers one asset, the company, for cash. The business’s entire value will be passed to the survivor of the buy-sell agreement, whether he sells it or holds it.
The producer will explain the product to each owner and schedule an appointment.
Producer: “One of your descendants will ultimately inherit the entire value of the business you own.” We don’t know who it will be. It is known that if the entire business’s value is in one of your estates, there will be an estate tax problem. Although the unlimited marital deduction can delay taxation, it will eventually cause problems if you don’t plan.
“I have ideas for how you can each address this problem and I would like to share them. Owner One, is Wednesday morning or Wednesday afternoon better for you?
It’s clear that these owners made the right decision to buy-sell their property. But was it enough?
If one of these owners fails to plan, the estate taxation will fall on the other owner, with the producer losing the opportunity. Each owner must plan for the possibility that he will be the survivor under the buy-sell policies, which opens the doors to estate planning. The sale of one creates an opportunity for another, which is total needs selling.
