In this article, we continue our discussion of The BEI Seven Step Exit Planning Process™. This article and the next cover the issue of continuity: making sure an owner’s family and business are protected if the owner does not make it to their planned departure date. To review, we kicked off this series with a comparison of Exit Planning and succession planning and followed that with: setting the owner’s goals, the critical importance of defining cash flow and protecting business value. We have discussed both transfers to insiders (assessing the prospect for success and owner and successor expectations) and sales to third parties.
Most business owners will leave their businesses during their lifetimes, rather than by death or injury. Still, most continuity plans, Buy-Sell Agreements particularly, focus solely on an exit resulting from death or permanent incapacity. Too many Buy-Sell Agreements fail to address far-more-common lifetime exits two simple reasons:
- Estate planning or business attorneys (at the suggestion of life insurance professionals) draft most Buy-Sell Agreements. Naturally, these professionals focus on what they know.
- Lifetime ownership transfer events are challenging to design, fund, and execute. They are often too complicated, complex, and beyond the experience of those who design and draft Buy-Sell Agreements.
The absence of lifetime events in Buy-Sell Agreements leaves too many owners, their companies, and their families exposed.
Show Me a Lifetime Event and I’ll Show You a Challenge
There are several lifetime exit events that owners can experience:
- Sale of interest to an outside party.
- Termination of employment by the company.
- Involuntary transfer due to bankruptcy or divorce decree.
- Dispute with other owners leading to a sale of ownership.
As unpleasant as it is for owners to contemplate their death or permanent incapacity, those events are easier for advisors to approach because they can more easily define and fund them. But look again at the above list of more challenging lifetime events and consider:
- On the day a business owners discovers that her co-owner is being sued and the co-owner’s ownership interest has attracted the attention of his litigious creditors, that’s challenging.
- When one owner turns to the other and says, “You know, this really isn’t all I’d hoped it would be so I’m leaving for Tahiti tomorrow. I’ll call you to let you know where you can wire my half of the business,” that’s challenging.
- When an advisor finds out that their client wants to buy out an uncooperative co-owner, that’s challenging.
To our knowledge, there is no insurance sold—at any price—that covers these and many other lifetime exits.
The Advisor's Job in All This
Exit Planning Advisors create, oversee, or contribute to business continuity agreements that cover both easy-to-fund and challenging (or unfunded) events because:
- Ownership transfers due to lifetime events occur far more frequently than transfers caused by death or incapacity.
- Very few professional advisors devote their time to planning for lifetime transfer events. Most focus solely on death or incapacity.
Exit Planning Advisors must take a seat at the table whenever business continuity is discussed.
Buy-Sell Agreements Can Launch the Comprehensive Exit Planning Discussion
A Buy-Sell Agreement is a truncated form of an Exit Plan. Creating one requires advisors to discuss the owner’s abilities to leave the business on terms consistent with their exit goals acquire a departing owner’s interest at a price they can afford.
The focus on achieving an owner’s goals in the context of an unplanned exit logically leads to a discussion of achieving an owner’s goals in a planned exit. This relationship makes the Buy-Sell Agreement a natural entry point for more comprehensive Exit Planning. A discussion of business continuity provides the ideal occasion for advisors to begin an Exit Planning conversation with owners.