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The Role of the Insurance Professional in Successful Exit Planning

Submitted by John Brown on Mon, 04/13/2015 - 3:29am
A female's hand holding a pen over a form that says Life Insurance

"I'd like to leave/sell my business. Can you help me?" How you answer this question determines whether you will represent your client and his or her company in the future.

3 Primary Responsibilities of an Insurance Professional

As an insurance professional and member of the owner's Exit Planning Advisor Team, you have three primary responsibilities when working with your business-owner clients:

  • Inform and educate the owner about the Exit Planning Process.
  • Facilitate the Exit Planning Process by coordinating your activities with those of the owner, and his/her other advisors.
  • Provide services necessary to ensure the owner's successful transition from the business.

Step One: Setting Exit Objectives

The insurance professional has one primary objective in Step One: Establish income needs for the owner and his or her family during lifetime, and at owner's death or disability.

Step Two: Determining Value/Price

  1. Determine the value of the business for estate and gifting purposes.
  2. Based on the owner and his or her family's current income, determine whether an income deficiency exists should the owner die or become disabled now.

Step Three: Preserving, Protecting, and Promoting Value

  1. Educate the owner about key-employee retention/motivation techniques.
  2. Determine the appropriateness of a retirement plan, in particular a defined benefit plan, to provide for the owner's future income needs post-exit.
  3. Design and fund non-qualified deferred compensation plans for key employees and the owner.
  4. Consider key-person insurance on the owner's life and the lives of key employees.

Step Four: Converting Business Value to Cash - Sale to Outside Third Party

  1. Introduce the owner to the appropriate transaction advisor (investment banker or business broker).
  2. Determine whether the owner's financial needs/Exit Objectives can be met by expected net sale proceeds.

Step Five: Transferring the Business to Insiders: Children, Key Employees, or Co-Owners

  1. Review the owner's financial Exit Objectives, specifically, the impact of using lowest defensible value when transferring the business to insiders considering the owner's income needs at death. Analyze the need for life insurance to replace lost income if owner dies before the insider transfer is completed.
  2. Provide key-person insurance on the lives of insiders who are acquiring the business.
  3. Design and fund the Buy-Sell Agreement between the existing owner and new (insider) owners.

Step Six: Contingency Planning for the Business

  1. Review existing Buy-Sell for consistency with Exit Plan. Suggest modifications as necessary.
  2. Sole-owners: Explain need for continuity and Stay Bonus Plan.
  3. Co-owners: Discuss the need for business continuity planning.
  4. Coordinate continuity planning with estate planning.

Step Seven: Wealth Preservation Planning

  1. Review the existing estate plan at the outset of the Exit Planning Process to ensure consistency with Exit Objectives and existing resources. Discuss the following with the owner and Advisor Team:
    1. Is ownership under the existing estate plan consistent with the owner's Exit Planning objectives?
    2. Does the estate plan need to be modified to meet business continuity issues addressed in Step Six?
    3. Does the owner's family achieve the financial security Exit Objective if the owner dies today?
    4. Review estate tax issues in light of Step Two valuation ranges.
  2. Make modifications to and fund the estate plan as determined above.
  3. Engage the owner in ongoing estate planning activities designed to meet other estate planning objectives, such as transferring wealth now to family members.
  4. In light of realistic business value, fund for the payment of estate taxes.


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