The initial Steps of The BEI Seven Step Exit Planning Process™ bring clarity to a business owner’s goals and aspirations, and the size of any gap between available resources and those needed to achieve the owner’s goals and aspirations. With that knowledge, owners and their advisors can begin the work of growing and preserving the business value necessary to achieve those lifetime exit goals.
But what happens if owners die (or become permanently incapacitated) before they can attain their lifetime exit goals and aspirations? Their businesses can falter or fail, and their families can be deprived of the income necessary to maintain their lifestyles, unless you, the Exit Planning Advisor, take steps to protect both the business and the business owner’s family.
Death, Be Not Proud: Benefits for Business Owners
Families have a lot to lose should the breadwinner die or become incapacitated before his or her planned business exit. Losses are nearly as extensive for the businesses they leave behind. As an Exit Planner, you can assume a huge role in giving business owners peace of mind by mitigating the losses to both their families and businesses.
Specifically, you and other members of your Advisor Team can design business continuity arrangements that:
- Enable the business owner’s family to maintain its lifestyle.
- Increase the chances that the business will survive its owner’s absence.
- Provide a means for the business to be transferred according to the owner’s wishes.
- Make the owner’s values-based goals achievable in his or her absence.
- Ensure the consistency of outcomes related to successor ownership, financial security, and other owner goals.
- Are both time- and cost-effective, because they incorporate the business owner’s estate-continuity planning goals into his or her Exit Plan.
Not Even Death Stops the Advisor: Benefits for Advisors
It’s hard to put a value on the peace of mind that you can provide business owners, but there are additional benefits to you in engaging owners in business continuity planning. A few include:
- Just as Exit Planning is owner-centric (i.e., founded on an owner’s goals), so too is business continuity planning in the Exit Planning context. As an advisor, business owners see you working to meet their goals rather than pushing an insurance or other funding product.
- The BEI Seven Step Exit Planning Process coordinates an owner’s business continuity planning with his or her estate planning.
- Our Members have found that business owners who engage in the first three Steps of the Exit Planning Process gain a unique appreciation of (a) the considerable effort and planning required to grow sufficient business value, cash flow, and personal investment assets and (b) the total assets required to maintain their desired lifestyles post-exit. As a result:
- Owners are highly motivated to do the estate and business continuity planning necessary to ensure that their lifetime goals are met if they die too soon.
- Owners have a reason to pay attention to what will happen to their businesses and families should they die before they exit. The exercise of determining the size of the gap between the resources currently available and those they need to ensure their financial security (and other goals) is a real attention-getter.
- Business owners appreciate the value of considering death planning from an income perspective. Resolving the “How do I provide my family adequate income?” question requires considerably more planning and funding than do straightforward Buy-Sell Agreements and estate planning documents.
The BEI Seven Step Exit Planning Process uncovers and highlights income and other exit goals that often go unnoticed when death planning is confined to standard buy-sell planning and funding. It does so by having business owners consider and decide on the income levels they want or need for themselves upon their exits. Should they die before exiting, owners almost always want that same level of income to be available to the surviving family. Let’s look at a simple example.
Will and Jack were equal co-owners of Will & Jack’s Fabrication, a relatively new, Colorado-based business worth $5 million, according to a recent appraisal. Will and Jack each received annual salaries of $375,000, an amount adequate to maintain their lifestyles. The company had an additional $1 million of EBITDA that the owners retained in the business to fund its healthy growth. Will and Jack had given some thought to selling the business, but they weren’t willing to sell if the income they used to support their lifestyles would decrease.
But then fate intervened.
One dark and stormy night, lightning fatally struck Jack. His estate received $2.5 million from Will, which was the full value of Jack’s ownership interest, for which Will had an insurance policy on Jack’s life for the full purchase price.
Before Jack’s death, he, his wife, and three children lived on his salary. After Jack’s death, the $2.5 million of sale proceeds generated about $100,000 each year (a 4% withdrawal rate).
Even though Jack’s estate received the full value of his interest in the company, his family’s income plummeted by two-thirds, from $375,000 to $125,000.
Once business owners realize how their deaths can affect their families—not just the ownership continuity of their companies—they are more amenable to acquiring more life insurance or engaging in the planning necessary to ensure that their families continue to receive the same level of income whether they live or not.
The BEI Seven Step Exit Planning Process focuses business owners’ attention on the consequences—financial and otherwise—that their premature deaths or incapacitation can have on their businesses and families in ways that traditional buy-sell planning does not. As a part of Exit Planning, owners can better understand that continuity planning at death means not only the continuation of their businesses for the benefit of surviving owners but also the continuation of the income needed to maintain their families’ lifestyles.
Throughout this series, we’ve highlighted the advantages of The BEI Seven Step Exit Planning Process for owners and their advisors. We’ve discussed the importance of setting goals, why determining the Asset Gap is critical to a successful business exit, how increasing business value and cash flow benefits owners and advisors, why Value Drivers matter, minimizing threats to business value, the nuances of a third-party sale, transferring ownership to key employees, and transferring ownership to children.