Succession Planning MOVING YOU FORWARD CONTINUING EDUCATION. A way to protect and preserve the business for future generations. Presenter s Name Title

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1 CONTINUING EDUCATION Succession Planning A way to protect and preserve the business for future generations Presenter s Name Title Life Insurance products are issued by: John Hancock Life Insurance Company (U.S.A.), Boston, MA (not licensed in New York) and John Hancock Life Insurance Company of New York, Valhalla, NY John Hancock. All rights reserved MLINY For Financial Professional Use Only. Not Intended For Use With The General Public.

2 Many small businesses can fail without proper succession planning. For Financial Professional Use Only. Not Intended For Use With the General Public. 2

3 Question #1: How do you make sure every kid receives their fair share of the family business? For Financial Professional Use Only. Not Intended For Use With the General Public. 3

4 Question #2: How do you prevent the loss of sweat equity in the family business? For Financial Professional Use Only. Not Intended For Use With the General Public. 4

5 Question 3: How do you ensure a fair price for the family business? For Financial Professional Use Only. Not Intended For Use With the General Public. 5

6 Question #4: How do you protect your business from the loss of a key employee? For Financial Professional Use Only. Not Intended For Use With the General Public. 6

7 The answer to all of these questions is: Succession Planning For Financial Professional Use Only. Not Intended For Use With the General Public. 7

8 What is Succession Planning? A plan put in place to ensure the survival of the business if something happens to one of its owners or key employees. It can be either: Key Person Insurance Buy-Sell Arrangements For Financial Professional Use Only. Not Intended For Use With the General Public. 8

9 Why Succession Planning? Without a properly funded succession plan in place, struggles for control can result in destruction of the business. Prevent sale of the business to outside owners. Make sure the business receives fair market value. Ensure sufficient cash to pay estate taxes, bills and income needs. For Financial Professional Use Only. Not Intended For Use With the General Public. 9

10 Types of Succession Plans Buy-Sell Arrangements Cross Purchase Entity/Redemption Purchase Key Person Insurance For Financial Professional Use Only. Not Intended For Use With the General Public. 10

11 Buy-Sell Arrangements A buy-sell arrangement is an agreement between business owners in which one party agrees to sell an interest in the business and the other agrees to buy it. For Financial Professional Use Only. Not Intended For Use With the General Public. 11

12 Buy-Sell Prospects All closely-held businesses Sole Proprietorships Partnerships S and C-Corporations For Financial Professional Use Only. Not Intended For Use With the General Public. 12

13 Why Use Buy-Sell Arrangements? Guarantee a buyer Create Liquidity Set a Fair Selling Price Fix Value For Financial Professional Use Only. Not Intended For Use With the General Public. 13

14 Cross-Purchase Arrangements An arrangement in which each business owner agrees to buy out the other owner(s) interest in case of retirement, disability, or sudden death. For Financial Professional Use Only. Not Intended For Use With the General Public. 14

15 Entity Purchase Arrangements Buy-sell arrangement between a business entity and its individual owners. The business agrees to buy the business interest of the owners upon death, disability, or retirement. For Financial Professional Use Only. Not Intended For Use With the General Public. 15

16 Key Person Insurance Insurance policy taken out on the life of a key employee or owner to protect the business in case of sudden death, disability or retirement. Key person could be an owner, partner, or employee whose knowledge and contributions to the company are invaluable. For Financial Professional Use Only. Not Intended For Use With the General Public. 16

17 Answer #1: Entity Buy-Sell Arrangement Hypothetical Example: King County Sports 17 of For Financial Professional Use Only. Not Intended For Use With the General Public. 17

18 History of King County Sports Brothers Jim and Wayne Quincannon opened a small canoe and wilderness shop in Today, King County Sports is the largest supplier of outdoor equipment in the Northwest. Jim has four kids who are active in the business. Wayne has two kids who are pursuing other interests. For Financial Professional Use Only. Not Intended For Use With the General Public. 18

19 The Facts In 1972, Jim and Wayne set up an entity purchase buy-sell arrangement In 1978, Jim retired and they updated the buy-sell arrangement to include their children. For Financial Professional Use Only. Not Intended For Use With the General Public. 19

20 The Problem Jim s kids are active in the day-to-day operations. Wayne s kids are not interested in the business. For Financial Professional Use Only. Not Intended For Use With the General Public. 20

21 The Solution: Entity Purchase Buy-Sell Arrangement King County Sports will purchase life insurance policies on Jim and Wayne. When Wayne passes away, the life insurance proceeds will be used to buy his shares from his children. Jim and his family will continue to run the business. For Financial Professional Use Only. Not Intended For Use With the General Public. 21

22 Here is what it looks like Stock Redemption Price Wayne s Estate King County Sports Premiums (lives of Jim and Wayne) Death Benefit Jim s Estate John Hancock For Financial Professional Use Only. Not Intended For Use With the General Public. 22

23 Summary By setting up an Entity Purchase Buy-Sell Arrangement, Jim and Wayne can ensure the success of King County Sports for the next generation. For Financial Professional Use Only. Not Intended For Use With the General Public. 23

24 Answer #2: Cross- Purchase Buy-Sell Arrangement Hypothetical Example: Cozy Corner Coffee Shop 24 of For Financial Professional Use Only. Not Intended For Use With the General Public. 24

25 History of Cozy Corner Cozy Corner coffee shop was established in 1985 by two college roommates, Abby Drew and Susan Bond. It started as a hangout for artists and college students and has grown into a mainstream business known for its great muffins and organic coffee. For Financial Professional Use Only. Not Intended For Use With the General Public. 25

26 The Problem Abby and Susan are getting ready to expand the business. They have agreed that if anything happens to either one, they do not want to sell out to Corporate America or have a new partner. They will need funds to buy the other out. For Financial Professional Use Only. Not Intended For Use With the General Public. 26

27 The Solution: Cross Purchase Buy-Sell Arrangement Abby and Susan will purchase life insurance on each other. Each is the owner and beneficiary of the policy on the other. If something happens, they will have the proceeds to purchase the business interest of the other. For Financial Professional Use Only. Not Intended For Use With the General Public. 27

28 Here is what it looks like (assuming Abby dies first) John Hancock Insurance Policy Death Benefit proceeds Death Benefit Susan Coffee Shop shares Cozy Corner Coffee Shop Abby s Estate Coffee Shop Shares pass to Abby s estate Abby For Financial Professional Use Only. Not Intended For Use With the General Public. 28

29 Summary By entering into a cross purchase buy-sell arrangement, Abby and Susan can be assured that there will not be a new partner if something happens to the other person. For Financial Professional Use Only. Not Intended For Use With the General Public. 29

30 Answer #3: Book Value and Capitalization Method Hypothetical Example: Plants Galore For Financial Professional Use Only. Not Intended For Use With the General Public. 30

31 History of Plants Galore Patrick Reagan, Scott Pons, and AJ Santoro worked for a major landscaping company and in 1997 left to start Plants Galore, a plant nursery and landscaping business. More and more people are moving into the area and the demand for landscaping and retail services has exploded. For Financial Professional Use Only. Not Intended For Use With the General Public. 31

32 The Problem Patrick, Scott, and AJ need to do some planning. They are reluctant to put together a succession plan, because they do not want to undervalue the business. For Financial Professional Use Only. Not Intended For Use With the General Public. 32

33 Possible Business Valuation Methods Book Value assets minus liabilities Capitalization of earnings - multiply earnings by a capitalization factor Formula use a formula that incorporates several different factors Appraisal use a professional appraiser to value the business Fixed Price fix the price in the agreement For Financial Professional Use Only. Not Intended For Use With the General Public. 33

34 The Solution: Business Valuation using the Book Value and Capitalization Method To ensure the fair purchase price of the business, it is important to determine its value often as part of the buysell arrangement. They will use a formula with both Book Value and Capitalization Method. This solution gives more flexibility in deriving a fair purchase price. All parties must agree on the price. For Financial Professional Use Only. Not Intended For Use With the General Public. 34

35 Summary By valuing the business regularly, Patrick, Scott and AJ can be assured that they will not get shortchanged when and if they sell the business. For Financial Professional Use Only. Not Intended For Use With the General Public. 35

36 Answer #4: Key Person Insurance Hypothetical Example: William West and Walker Industries 36 of For Financial Professional Use Only. Not Intended For Use With the General Public. 36

37 William West William West is age 45. He is the top sales person for Walker Industries. He is the adopted son of the founder, Tom Walker. He is not only the top sales person, but has a very large network. It would take someone years to build up a client list like his. For Financial Professional Use Only. Not Intended For Use With the General Public. 37

38 The Facts William West is the Sales Leader. Tom Walker and Walker Industries would be lost without him. It will take at least two people, if not more, to replace him. For Financial Professional Use Only. Not Intended For Use With the General Public. 38

39 The Problem Walker Industries does not have enough liquid assets to train and hire two replacements for William. For Financial Professional Use Only. Not Intended For Use With the General Public. 39

40 The Solution: Key Person Insurance Walker Industries will buy a life insurance policy on the life of William West. William West will not have any interest in the policy. Walker Industries is the owner and beneficiary of the policy. For Financial Professional Use Only. Not Intended For Use With the General Public. 40

41 Here is what it looks like Walker Industries Walker Industries pays the premiums Upon William s death, Walker Industries will receive the death benefit proceeds John Hancock Life Insurance Policy William West For Financial Professional Use Only. Not Intended For Use With the General Public. 41

42 Summary By implementing key person insurance, Walker Industries will have the funds to hire and train replacements as well as weather the storm should something happen to William West. For Financial Professional Use Only. Not Intended For Use With the General Public. 42

43 Business Succession Planning Succession plans are put in place to ensure the survival of the business upon retirement, death or other changes in the business relationship. They are an essential part of any business and can help make the transition of ownership to the next generation easier. For Financial Professional Use Only. Not Intended For Use With the General Public. 43

44 Disclosures Insurance products are issued by: John Hancock Life Insurance Company (U.S.A.), Boston, MA (not licensed in New York) and John Hancock Life Insurance Company of New York, Valhalla, NY Insurance policies and/or associated riders and features may not be available in all states. This material does not constitute tax, legal or accounting advice and neither John Hancock nor any of its agents, employees or registered representatives are in the business of offering such advice. It was not intended or written for use and cannot be used by any taxpayer for the purpose of avoiding any IRS penalty. It was written to support the marketing of the transactions or topics it addresses. Comments on taxation are based on John Hancock s understanding of current tax law, which is subject to change. Anyone interested in these transactions or topics should seek advice based on his or her particular circumstances from independent professional advisors John Hancock Life Insurance Company (U.S.A.). All rights reserved. For Financial Professional Use Only. Not Intended For Use With the General Public. 44

45 Thank you!