Business Succession Planning Transfer or sell your business on your terms

Business Succession Planning Transfer or sell your business on your terms

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HAVE YOU CONSIDERED WHAT WILL HAPPEN TO YOUR BUSINESS WHEN YOU ARE NO LONGER ACTIVELY INVOLVED? WHO WILL TAKEOVER YOUR PARTNER, CHILDREN, A KEY EMPLOYEE OR A COMPETITOR? HOW DO YOU ENSURE A FAIR PRICE IF A?SALE NEEDS TO BE MADE QUICKLY? As a successful business owner, growing your business has likely been a huge investment of time, energy and capital. Now your business is the source of financial well-being for you, your family, business partners and employees. You may be looking forward to many prosperous years to come, but what if something happens to your health? What will happen if at some point you choose to retire? 1 2 The first step of business succession planning is to determine what each owner would like to happen to the business in the event an owner becomes disabled, retires or dies. In an ideal situation, all partners and their beneficiaries would be in agreement concerning future plans for the business. If an agreement cannot be reached and implemented, the business may need to be sold quickly for less than market value to pay estate taxes or satisfy beneficiary interests. Even in cases where the business may be saved, the uncertainty surrounding the business future may result in lost customers and sales. Implementing a plan for the succession of your business is the best method to ensure a fair and orderly transition. DO YOU HAVE THE CASH AVAILABLE TO BUY OUT ANOTHER PARTNER? DO ANY OF YOUR PARTNERS HAVE THE MEANS TO PURCHASE YOUR INTEREST? The second step of a business succession plan is ensuring that there is funding in place to carry out the owners wishes. Clearly, having sufficient cash on hand for this situation would be a huge benefit, but that isn t very common. If inadequate savings are available when needed, borrowing may become a necessity. Unfortunately, borrowing money may be challenging since the lender may question the business stability following an owner s disability or death. Please note: This document is intended to provide introductory information on the subject matter. MetLife does not provide tax and legal advice. You should consult with independent financial, tax and/or legal professionals before making financial investment or planning decisions. 1

FORTUNATELY, THERE ARE A NUMBER OF POTENTIAL SOURCES OF CASH THAT CAN FUND BUY-OUTS. Systematically saving may provide the assets needed over time but may be insufficient if disability or death occurs earlier than anticipated. Installment sales can be another option where the owner or beneficiaries are paid over time for the ownership share. The main drawback of this method is it often forces the departing owner or beneficiaries to rely on the future success of the business for continued payments, even though the recipients no longer have any day-to-day control. Life insurance is often used to fund business succession plans because of its flexibility. The premiums are typically moderate compared to the total amount of money that would need to be raised if a death did occur. In addition, permanent life insurance policies have a cash value component that may be accessed through withdrawals and loans in the event an owner becomes disabled or retires. A NOTE ABOUT LIFE INSURANCE DISTRIBUTIONS: Distributions are generally treated first as a tax free recovery of basis and then as taxable income, assuming the policy is not a Modified Endowment Contract (MEC). However, different rules apply in the first fifteen policy years, when distributions accompanied by benefit reductions may be taxable prior to basis recovery. Non-MEC loans are generally not subject to tax but may be taxable when the policy lapses, is surrendered, exchanged or otherwise terminated. In the case of a MEC, loans and withdrawals are taxable to the extent of policy gain and a 10% penalty may apply if taken prior to age 59½. Always confirm the status of a particular loan or withdrawal with a qualified tax advisor. Cash value accumulation may not be guaranteed depending on the type of product selected. CASE STUDY: BD ARCHITECTS Ben (age 42) and his brother Dennis (age 38) started their architecture firm nearly ten years ago. While they initially struggled, they have been able to grow the business significantly over the last several years and are even in the process of expanding. THE CONCERN When discussing the possibility of expanding with their financial professional, it became clear that the primary concern for each was how the business could be impacted if something happened to the other. Neither has the cash available to purchase the other s share or wants to be forced to sell to a third party. Their wives don t have any real interest in architecture and their children are all under age ten, so any potential involvement they may have is in the distant future. THE SOLUTION Ben and Dennis set up a second meeting with their financial, tax and legal professionals to discuss their business succession planning options. They decide to establish a buy-sell plan where each will purchase the shares of the other owner, when it becomes necessary, for a specified price. To provide funding for the agreement, each purchases a life insurance policy on the other. They select permanent coverage policies for the potential to access the policies cash value if needed. 2

ESTABLISHING A BUY-SELL AGREEMENT A formal business succession plan is often referred to as a buy-sell agreement. The plan should serve as a roadmap for the transfer of your business to successor owners, helping to assure its ongoing success as well as the financial security of you and your family. 3 The third step of business succession planning is to document the plan in writing. A buy-sell agreement is a written, contractual agreement between the business owners as to how the business interests will be transferred and the conditions which will trigger the transfer. Typically, such triggering events would include the death, permanent disability, bankruptcy or termination of employment of an owner, but additional events may be added to your contract if desired. The reality is that at some point you will leave the business. The goal is to have an orderly transition that will not jeopardize a lifetime of hard work or the financial security of family members, employees and/or business partners. A BUY-SELL AGREEMENT IS IMPORTANT IF: There is potential for inexperienced beneficiaries, or outsiders, to become partners. You do not have readily available means to purchase your partners business interests. Beneficiaries may demand more than current market value in exchange for their interest. Long-term financing potential is important. Creditors may view the business as more stable with a continuation plan in place. The company s cash flow is insufficient to support a disabled owner. You want to be assured of a future market for your business by identifying a buyer in advance who may include children, key employees or even competitors. HOW THIS WORKS Business Succession Cross Purchase Plan Premiums STEP 2 Policy Insuring Dennis Interest Business STEP 1 Agreement Ben STEP 2 Premiums Policy Insuring Ben s Interest Ben s Estate STEP 3 Purchase Business Interest Dennis STEP 3 Death Benefit THE BENEFIT By creating the business succession plan, Ben and Dennis have been able to ensure a buyer and predetermined selling price for each of their interests in the event either one becomes unable to make meaningful contributions to its success. Funding the plan with life insurance made sense to Ben and Dennis because it will provide the means for either of them to purchase the other s ownership interest from the deceased s beneficiaries. The policy allows them to fully fund this obligation with a series of relatively moderate premiums in comparison to the full amount which would otherwise be required. As a result, each of their families will be able to maintain their current standard of living, and the survivor will not be forced to take on an additional partner. They like the cash value feature of the policies to have the ability to supplement other unforeseen income needs related to other triggering events identified within the business succession plan. 3

Core Stories for Life. There are concepts that focus on helping you or your business: Create financial protection for your family Grow equity to help preserve your lifestyle, and Leave a legacy to the ones you love Life insurance is a flexible product that offers death benefit protection and may also offer an opportunity to save for your own future. Evaluating all available financial opportunities may help you reach your financial goals. Life insurance is one of those opportunities providing protection for today and helping prepare for tomorrow. This material is part of a series of financial strategies using life insurance named Core Stories for Life. These materials are designed to aid you and your financial professional in understanding the benefits of life insurance as a key financial asset within your overall portfolio. 4

The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance or other financial products and services. Clients should seek advice based on their particular circumstances from an independent tax advisor since any discussion of taxes is for general informational purposes only and does not purport to be complete or cover every situation. MetLife, its agents, and representatives may not give legal, tax or accounting advice and this document should not be construed as such. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. Prospectuses for Equity Advantage Variable Universal Life, and for the investment portfolios offered thereunder, are available from MetLife. The policy prospectus contains information about the policy s features, risks, charges and expenses. The investment objectives, risks and policies of the investment options, as well as other information about the investment options, are described in their respective prospectuses. Clients should read the prospectuses and consider this information carefully before investing. Product availability and features may vary by state. MetLife variable life insurance policies have limitations, exclusions, charges, termination provisions and terms for keeping them in force. There is no guarantee that any of the variable investment options in this product will meet their stated goals or objectives. The account value is subject to market fluctuations so that, when withdrawn, it may be worth more or less than its original value. Guarantees are subject to the claims-paying ability and financial strength of the issuing insurance company. Life insurance products are issued by MetLife Insurance Company USA, Charlotte, NC 28277 and in New York only, by Metropolitan Life Insurance Company, New York, NY 10166. All guarantees are based on the claims-paying ability and financial strength of the issuing insurance company. Variable products are distributed by MetLife Investors Distribution Company. Insurance Products Are: Not A Deposit Not FDIC-Insured Not Insured By Any Federal Government Agency Not Guaranteed By Any Bank Or Credit Union May Go Down In Value Metropolitan Life Insurance Company 200 Park Avenue New York, NY 10166 metlife.com MetLife Insurance Company USA 11225 North Community House Rd Charlotte, NC 28277 1410-2504 CLVL22663-1 L1014393156[0416] 2014 METLIFE, INC.

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