buy sell planning mark simon
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Copyright 2009 The Ohio National Life Insurance CompanyD-0243_01-09
Buy-Sell PlanningBuy-Sell Planning
Transferring Your Business OwnershipTransferring Your Business Ownership
Presented by:Mark L. SimonFinancial Services ProfessionalCalifornia Insurance License No. 0E41454
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Buy-Sell Planning:Buy-Sell Planning:
An effective way for business owners to protect their interest in the event of death, disability or retirement.
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Triggering Events:Triggering Events:
DeathDisabilityRetirement
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Every Business Every Business Has Three Values:Has Three Values:
1. Going concern value2. Liquidation value3. Gone value
$$
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You Want:You Want:
Fair value for your businessPrompt settlementFixed estate tax valueRelief to family from business
worries
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The Remaining The Remaining Owners Want:Owners Want:
Full control of the businessFair payment for the businessNo interference from deceased’s
heirsSmooth and prompt transferContinued business credit
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Your Family Needs:Your Family Needs:
Fair value for the businessTimely payment of the purchase
priceCash free from income and capital
gains taxes
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Don’t ignore Don’t ignore the issues,the issues,or you’ll be sure or you’ll be sure to have a problemto have a problem ..
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Buy-Sell Advantages:Buy-Sell Advantages:
Guarantees a buyerSets a fair market price for buyers
and sellersEstablishes estate tax valueProvides money for heirs free from
income and capital gains taxesProvides for a smooth transition
of ownershipCreates peace of mind
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Buy-Sell: Everyone Wins Buy-Sell: Everyone Wins
Business Owners: peace of mindFamily Members: cash for the
businessCreditors: less default riskSuppliers: remain in placeKey Customers: assured of
continuing relationshipEmployees: job security
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Types of Buy-Sell Types of Buy-Sell Agreements:Agreements:
Cross purchaseStock redemption
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InsuranceCo..
A
B’sB’s
100 shares $250,000
Estate
100 shares $250,000
100 shares
$250,000A
Bpremiumspremiums
$250,000 death proceeds
BB
Cross PurchaseCross Purchase
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100 shares $300,000
Ins. Co.Ins. Co.
premiumsABC, Inc.
300 shares outstandingValuation: $900,000
A’s stock is retiredby the corporation
$300,000death proceeds
100 shares $300,000
100 shares $300,000
A B C
death proceeds
Stock RedemptionStock Redemption
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Fair Market Value
Business ValuationBusiness Valuation
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Business Business Valuation MethodsValuation Methods
Per share price orPer share price ortotal dollar amount total dollar amount
based on one based on one of these methodsof these methods
Book Value
Agreed Formula
Capitalized Earnings
Agreed Value
Appraised Value
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Adopt a buy-sell agreement and fund it!
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Funding AlternativesFunding Alternatives
Personal fundsBank loanSinking fundInstallment payments to heirsInsurance
Which funding alternative makes the most sense for you?
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Personal FundsPersonal Funds
Unrealistic in most casesDo you have large sums of cash
on hand?Is this the highest and best use
of business funds?
Tip: In nearly all cases, use of personal funds is not a viable option.
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Bank LoanBank Loan
Tip: Dollar-for-dollar, a bank loan is usually the most expensive funding option.
Advantages Disadvantages
Buys the business time
Interest added to price
Avoids using current dollars
Business or owners may not qualify for a loan
Interest payments may be deductible
Default risk
Interest rate risk
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Sinking FundSinking Fund
Advantages Disadvantages
If fully funded, provides a lump sum
Timing is impossible to predict
Only alternative if owners are uninsurable and loans unavailable
Accumulating large amounts of cash is difficult
Accumulated with after tax dollars
High opportunity cost
Tip: If death or disability occurs in the early years,
the sinking fund will be inadequately funded.
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Installment PaymentsInstallment Payments
Advantages Disadvantages
Business transfers between family members
Interest is added to buyout price
Repayment terms may be favorable Default risk
Interest payments may be deductible
Heirs may need a lump sum
Inflation risk
Tip: The risk of default on installment payments increases as the length of the installment period increases.
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Life InsuranceLife Insurance
Advantages DisadvantagesSelf-completing Requires insurabilityIncome tax-free death benefits
Non-deductible premium payments
Tax-deferred cash accumulation
Policy cash values may trigger the alternative minimum tax for large C corporations
Tax-advantaged Access
to cash valuesStrengthens company’s credit
Tip: Subject to insurability, life insurance is often the most affordable funding
alternative.
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Cost On-the-DollarCost On-the-DollarExample compares the cost per dollar of buyout for the alternatives listed:
$1.00
$1.75
$0.78
$1.58
$0.36
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
$1.60
$1.80
PersonalFunds
Bank Loan Sinking Fund InstallmentPayments
Insurance
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Term Life InsuranceTerm Life Insurance
Temporary needsNewly-formed
businesses
Tip: Convertible term provides flexibility.
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Permanent Life InsurancePermanent Life Insurance
Change is inevitable “Health is a
temporary condition.”
Long-term solution for long-term need
Tax-deferred growth of cash value*
Tax advantaged access to cash value**Potential alternative minimum tax exposure for some C corporations.
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The Impact of GrowthThe Impact of Growth
Keep pace with business appreciation
Annually update coverage
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Don’t forget about the possibility of disability.
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Probability of at Least One Probability of at Least One Long-Term DisabilityLong-Term Disability
Number of People in a Group
Age 1 2 3 4
25 31% 53% 68% 78%
35 29% 50% 65% 75%
45 26% 46% 60% 71%
55 20% 36% 48% 58%
Source: Based on 1985 CIDA, Male, Classes 1 and 2 (4A/3A equivalent), 90-day waiting period.
Prior to Age 65
Tip: Disability insurance and permanent (cash value) life insurance often fund disability buyouts.
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Dreaming of Retirement?Dreaming of Retirement?
When your buy-sell is funded with a permanent (cash value) life insurance policy, the accumulated cash values can be accessed and used to fund a lifetime retirement sale.
Tip: The policy can remain in force or be surrendered when the cash is needed.
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Plan now for the successful futureof your business.
Today
Tomorrow
Take the Next StepTake the Next Step