Business Continuation Plans

Why Do You Need A Business Continuation Plan?
Your business could be in for a shock if you one of your partners died or became disabled.

Without proper planning, you might find yourself working for or with one of the heirs. It might also be financially difficult, if not impossible, to buy back the outstanding ownership interest. That’s a business takeover that neither side wants or wins.

Most entrepreneurs are too busy building their business to spend time planning for a business continuation; however, Hoover and Associates can design and implement coverage solutions to help prevent problems before it’s too late.


How Would You Propose To Buy Out Your Business Associate? One Answer Is An Insured Buy/Sell Agreement!

Business Continuation Planning Using Insured Buy-Sell Agreements

There Are Two Basics Types of Insured Buy/Sell Agreements:

Cross-Purchase Agreement – Whereby the surviving owners are obligated to buy and the estate is obligated to sell a deceased partner’s business interest.

  • Owners “A” and “B” enter into a buy/sell agreement.
  • Each owner is the applicant, owner, premium payer and beneficiary of a life and/or disability insurance policy covering each other’s life.
  • At death of owner “A” surviving owner “B” receives tax-free proceeds from the insurance company.
  • Owner “B” uses the proceeds as cash to purchase owner “A”s’ business interest from his or her estate.


Stock Redemption or Entity Purchase Agreement – Whereby the business is obligated to buy and the estate is obligated to sell a deceased partner’s business interest

  • Owners “A” and “B” enter into a buy/sell agreement.
  • The business is the applicant, owner, premium payer and beneficiary of a life and/or disability insurance policy covering each other’s life.
  • At death of owner “A” the business receives tax-free proceeds from the insurance company.
  • The business uses the proceeds as cash to purchase owner “A”s’ business interest from his or her estate.

Benefits of an Insured Buy-Sell Agreement to the Heirs:

  • Provides a Market: Often this is the only market for the disabled or deceased’s business interest, at a fair price. The benefit is received in cash, without delay and at a price previously fixed by an insured buy-sell agreement.
  • Eliminates Emotional Conflicts: The danger of friction and bickering between the heirs and the surviving stockholders has been reduced or eliminated.
  • Creates Cash: The deceased’s interest, instead of remaining in a speculative business, is converted into cash, which may, when the estate has been closed, be invested by the heirs in non-speculative assets, thus providing a stable income for the family. The family of the deceased is not dependent upon the surviving owners for adequate income.
  • Expedites Settlement of the Estate: The business interest, which is usually the major asset of the estate, is immediately converted into cash. The executor has the liquidity necessary to pay final expenses, debts, taxes, and other probate costs, promptly and economically.

 

Benefits of an Insured Buy-Sell Agreement to the Surviving Owners:

  • Stabilizes The Business: In the event of the death or disability of an owner the survivors will own the company and control of the business is assured.
  • Creates Peace of Mind: Owners have a positive attitude knowing that if an owner dies or becomes disabled, heirs will receive the full value of the business interest in cash, and the surviving owners will be the sole owners of the business.
  • Strengthens Credit: Insured buy-sell agreements creates an automatic payment of cash to buy the business interest of a deceased or disabled owner thus insuring preservation and continuance of the business.
How do you propose to buy out your business associate?
What Are The Alternatives?
There are five basic options:
At What Cost?
For each $1 of purchase price:
What Cash Factors?
Items which add to the cost of buying the business
Is each alternative viable?
(Possible Obstacles)
1. Liquidating existing cash from the business One Dollar +
Interest
Principal and lost future earnings on the principal If the buyer has sufficient cash or other assets at the time of the purchase
2. Borrowing from a bank and paying a lump sum to the estate of the decedent One Dollar +
Interest
Principal and interest paid on the loan If the loan is approved
If interest rates are reasonable
If after-tax, disposable income can absorb interest and principal payments
3. Making installment payments to the estate out of personal income One Dollar +
loss of interest earnings
Principal and interest paid to the estate If the estate is willing to accept installment payments
If the buyer and estate agree on a duration and interest rate of installments
4. Company makes installment purchases out of future profits One Dollar +
loss of interest earnings
Principal and interest paid to the estate If sales and income do not decrease
If profit margins remain the same
If corporate income taxes remain level
5. Once the purchase price is agreed upon, purchase life and/or disability insurance for that amount Discounted
Dollars
Premium payments If the stockholder is insurable