Business Plans Exit Strategy - PDF by zea18247

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									  WHAT IS YOUR EXIT
    STRATEGY?




 YOUR EXIT STRATEGY
• What are your plans for “gracefully”
  leaving your business either during your
  lifetime or when you die?




 YOUR EXIT STRATEGY
• What plans have you made regarding your
  retirement?




                                             1
 YOUR EXIT STRATEGY
• What plans have been put in writing
  regarding the transfer of ownership, control
  and management of your business in the
  future?




 YOUR EXIT STRATEGY
• Who will run your business when you are
  no longer involved? (Who runs it now
  when you are on vacation or away from the
  business?)
• If you had died last week, who would be
  running your business right now?




 YOUR EXIT STRATEGY
• What plans have been made to ensure that
  your spouse has an adequate income in the
  event of your death?




                                                 2
 YOUR EXIT STRATEGY
• To what extent will your children be
  involved in your business?




 YOUR EXIT STRATEGY
• What steps have you taken to make sure
  that all of your children are treated fairly in
  terms of dividing your estate?




 YOUR EXIT STRATEGY
• Have you made sure that business loans can
  be repaid, while leaving sufficient working
  capital in the business?




                                                    3
 YOUR EXIT STRATEGY
• Will estate taxes
  force the sale of
  valuable growth
  assets or income-
  producing assets?




 YOUR EXIT STRATEGY
• What do you think the
 business is worth?
• Would your absence
 (death, disability, or
 retirement) affect this
 value?




       WHAT IS YOUR
       RETIREMENT
        STRATEGY?




                           4
     RETIREMENT STRATEGY
  • What have you done to make sure that you
    will have a substantial income from your
    business when you retire?
  • Do you have a “qualified” retirement plan
    (pension, profit-sharing, 401k, Keogh, etc)?
  • Does it provide adequate
    accumulation for your
    retirement?




     RETIREMENT STRATEGY
  • Are you able to put away as much as you
    would like to in these qualified plans?
  • Are you putting away too much money for
    non-key employees?




     RETIREMENT STRATEGY
• Are your assets allocated in a way consistent
  with your loss-tolerance?
• How much of your assets do you want to be
  exposed to the next market correction?




          • Are you taking
            advantage of low-risk
            tax sheltering financial products?




                                                   5
   RETIREMENT STRATEGY

• If your current
  plans will not
  provide adequate
  income at
  retirement, how
  will you fund the
  shortfall?




         DEDUCTIBLE LIFE
           INSURANCE
• Are you aware that most retirement plans
  can provide life insurance
• Premiums can be paid with deductible plan
  contributions




   RETIREMENT STRATEGY
• Are you satisfied with the administration
  and investment management of you current
  plans?




                                              6
      RETIREMENT STRATEGY
• Have you integrated long-term care
  funding into your retirement
  planning?
• Are you aware that you business can
  pay for long-term care insurance
  selectively for key people only?
• If your business is a C Corporation,
  an unlimited premium is deductible
  AND not reportable as personal
  income.




               Products & Plans
  • Personal life insurance as triple-duty asset
      purchase
  •   Redesigned 401(k) plans
  •   Takeover of 401(k) plans
  •   Defined Benefit plans
  •   Life insurance purchased by qualified plan
  •   Investment accounts




       WHAT IS YOUR FAMILY
      INCOME CONTINUATION
              PLAN?




                                                   7
          FAMILY INCOME
        CONTINUATION PLAN
 • What have you done to make sure that your
    family will have a sufficient income at your
    death?




          FAMILY INCOME
        CONTINUATION PLAN
• If the business is not sold, how
  does your spouse get income
  from the business?
• When your salary stops, what
  will replace this source of
  income for your surviving
  family?




          FAMILY INCOME
        CONTINUATION PLAN
• When was the last time
  your personal life
  insurance was reviewed?
• Is it accomplishing your
  goals
• Is it payable properly and
  to the right parties?




                                                   8
          FAMILY INCOME
        CONTINUATION PLAN
                   • If you are assuming that your
                     surviving spouse will “step into
                     your shoes” in the business, have
                     you made adequate preparation
                     for this?

• If you are assuming that a child
  will take over and take care of
  “mom” has this been sufficiently
  thought out and explained to
  your successors?




          FAMILY INCOME
        CONTINUATION PLAN
                       • If your child is your
                         successor and your wife
                         is not his (or her) mother,
                         what have you done to
                         protect all the parties and
                         avoid unnecessary
                         conflict?




              Products & Plans
 • Personal life insurance-paid by bonus
 • Split-dollar life insurance
 • Personal life insurance paid for personally




                                                         9
      DO YOU HAVE AN
     UP-TO-DATE BUY &
     SELL AGREEMENT?




  BUY & SELL AGREEMENT
                 • Do you have an up-to-date
                   shareholder or stock
                   purchase agreement
                   between you and your co-
                   shareholders?




  BUY & SELL AGREEMENT
• At your death do you
  want your family to
  continue to hold an
  interest in the business?

• Would you advise your
  family to invest in your
  business if you were not
  there running it?




                                               10
             CONTROL!
• Do you have a desire to be in business with
  your partner’s wife’s second husband’s
  attorney?




 BUY & SELL AGREEMENT
• If you have an agreement, do you know
  how the business is valued?




 BUY & SELL AGREEMENT
• Under your existing agreement, what are the
  terms of the buy-out?




                                                11
   BUY & SELL AGREEMENT
  • Where will the money
    come from to fund the
    promises you’ve made
    in your agreement?




        THE MISSING PAGE?
 • According to your agreement, what will happen if
   one of the owners gets in a serious accident---but
   does NOT die?
 • If the agreement dictates a buy-out, where will the
   funds come from?




   BUY & SELL AGREEMENT
• If your interest is to be retained by any one
  other than your spouse, have you provided
  for potential estate taxes?
• If your spouse will take your stock, how
  will taxes be paid at the “second death?”




                                                         12
 ARE YOU PROTECTING THE
 MOST VALUABLE ASSET OF
    YOUR BUSINESS?

       KEY MANAGEMENT LOSS




  Do you have any employees who
   are vital to the profitability of
           your business?
        •   Sales or Account Management
        •   Operations
        •   Financial
        •   Other ?
        •   What about you?




                Human Life Value

• “It is the cause (the creator) of all
   other values and not merely an
   effect. Were it not for the life value,
   there would be no property values at
   all.”
    :::The Economics of Life Insurance
              Solomon Huebner




                                             13
      Human Life Value

• “…the capitalized monetary worth of the
   earning capacity resulting from the economic
   forces that are incorporated within our being:
   namely our character and health, our education,
   training and experience, our personality and
   industry, our creative power and our driving
   force to realize the economic images of the
   mind.”
         :::The Economics of Life Insurance
                   Solomon Huebner




   KEY MANAGEMENT LOSS
 • Imagine your business tomorrow if one of
   these top people died or became disabled?
   How would this impact the business?




      ACCOUNT RETENTION
  • Would you suffer a
    loss of any customers
    if one of your key
    people were no
    longer there?




                                                     14
  YOUR CREDIT STANDING
• Is there any potential
  effect on working
  capital or credit lines
  if you or another key
  employee was gone?




   REPLACEMENT COSTS
(including “opportunity” costs)
• How long would it take to find a
  replacement for one of your key people?
• Would there be extra expenses for search or
  training or mistakes made by a new person?




     ARE YOUR PERSONAL
       ASSETS AT RISK?
• Do you sign
  twice” for your
  business loans and
  credit lines? Does
  your bank have
  your personal
  guarantee?




                                                15
                 Products
• Key person life insurance
• Key person disability insurance
• Personal life insurance (with collateral
  assignment to creditor)




       THE CARE &
    FEEDING OF YOUR
     KEY EMPLOYEES




 THE CARE & FEEDING OF
  YOUR KEY EMPLOYEES
• What special
  benefits are you
  providing to your
  top people---in
  order to reward and
  retain them?




                                             16
 Will your top employee jump at
    the next juicy job offer?
                 • You can’t keep him chained
                    to the floor
                 • But you can provide a
                   custom-designed plan that
                   requires no IRS approval
                 • It won’t guarantee retention,
                   but the executive will suffer a
                   great financial loss if he or
                   she leaves




 THE CARE & FEEDING OF
  YOUR KEY EMPLOYEES
• What are you
 doing that would
 attract a high
 quality
 candidate—
 especially one
 who works at a
 larger company?




          Is this your
     executive benefit plan?




                                                     17
  THE CARE & FEEDING OF
   YOUR KEY EMPLOYEES
         • What are you doing to
          correct the reverse
          discrimination inherent
          in your qualified
          retirement plan (and
          most of your other
          benefit plans)?




  THE CARE & FEEDING OF
   YOUR KEY EMPLOYEES
• Every conventional benefit plan has a “cap.”
• Every cap implies a maximum amount of
  covered compensation
• Every person who earns more than this
  maximum will receive a lower % benefit than
  lower paid employees
• Each of these employees is suffering from
  “reverse discrimination”




                Group Term Life Insurance Plan
                    Reverse Discrimination
            200% of Salary
          200,000 Maximum
                            Actual
           Total Life Ins. Percent 200% Short-
          Comp Benefit of Pay of Pay           Fall
Adam       25,000    50,000   200%    50,000       0
Karen      50,000   100,000   200%   100,000       0
Bruce      95,000   190,000   200%   190,000       0
Marcia    230,000   200,000    87%   460,000 260,000
David     400,000   200,000    50%   800,000 600,000




                                                       18
                       401 (K) Deferral Plan
                      Reverse Discrimination
            10.00% of Salary
             16,500 Maximum
                              Actual
                     Yearly Percent 10.00%     Short-
            Salary Deferral of Pay of Pay       Fall
Adam         25,000    2,500 10.00%    2,500         0
Karen        50,000    5,000 10.00%    5,000         0
Bruce        95,000    9,500 10.00%    9,500         0
Marcia      230,000   16,500 7.17%    23,000     6,500
David       400,000   16,500 4.13%    40,000    23,500




                  Defined Benefit Pension Plan
                     Reverse Discrimination
         Retirement Benefit= 100% of Salary
                             16,250 Maximum
                           Actual
                   Monthly Percent 100%         Short-
            Salary Benefit of Pay of Pay         Fall

Adam    25,000  2,083 100.0% 2,083     0
Karen   50,000  4,167 100.0% 4,167     0
Bruce   95,000  7,917 100.0% 7,917     0
Marcia 230,000 16,250 84.8% 19,167 2,917
David 400,000 16,250 48.8% 33,333 17,083




                 Group Long Term Disability Plan
                     Reverse Discrimination
                60% of Salary
               5,000 Maximum
                             Actual
              Total Monthly Percent 60.00% Short-
              Comp Benefit of Pay of Pay Fall

 Adam    25,000         1,250   60%      1,250      0
 Karen   50,000         2,500   60%      2,500      0
 Bruce   95,000         4,750   60%      4,750      0
 Marcia 230,000         5,000   26%     11,500 6,500
 David 400,000          5,000   15%     20,000 15,000




                                                         19
 THE CARE & FEEDING OF
  YOUR KEY EMPLOYEES
• Reverse discrimination is corrected by
  adding supplementary benefits for the
  executives affected
• Additional life insurance
• Additional disability insurance
• Additional retirement benefits




 THE CARE & FEEDING OF
  YOUR KEY EMPLOYEES
• Have you installed plans that provide
  “wow” benefits while tying the executives
  to the company?




    DO YOUR EMPLOYEES
   KNOW HOW MUCH YOU
    SPEND ON PROVIDING
     BENEFITS TO THEM?




                                              20
        Executive Benefit Plans
•   Bonus Plans
•   Restrictive Bonus Plans
•   Split-Dollar plans
•   SERPS
•   Deferral Plans




     HAVE YOU DONE
    PROPER DISABILITY
       PLANNING?




    DISABILITY PLANNING
• What specific plans have you implemented
  regarding the ongoing payment of income
  to yourself and other key people in the
  event of disability?
• (Don’t confuse legal ability to pay with
  financial ability to pay…)




                                             21
  DISABILITY PLANNING
• If you are sick or injured for a lengthy
  period (or permanently), will you retain
  your ownership in the business?
• What plans have been made to continue
  your income and the retain or sell your
  interest in the business?




  Have you made sure disability
     payments are tax-free?
• Failure to document a “plan” could affect
  deductibility of payments to C Corp shareholders
• Failure to document a “plan” could terminate S
  Corporation election
• Failure to document a “plan” could affect taxation
  to employees
• Whether or not you transfer the economic risk, a
  written plan will avoid adverse tax consequences




Would You Have to Close Up Shop?
• Does your business generate profit chiefly
  from your personal services?
• How would you pay your rent, salaries, and
  other overhead if your were not working for
  an extended period?




                                                       22
  DISABILITY PLANNING
• Are you aware of the pitfalls and limitations
  of Group Long Term Disability plans
  (“Group LTD”)?




  DISABILITY PLANNING
• Are you and your executives
  suffering reverse
  discrimination in your Group
  LTD plan?
• Do you know what
  percentage of total income
  you are guaranteeing to
  yourself and your key
  executives?




            Group Long Term Disability Plan
                Reverse Discrimination
           60% of Salary
          5,000 Maximum
                        Actual
         Total Monthly Percent 60.00% Short-
         Comp Benefit of Pay of Pay Fall

Adam    25,000    1,250   60%     1,250      0
Karen   50,000    2,500   60%     2,500      0
Bruce   95,000    4,750   60%     4,750      0
Marcia 230,000    5,000   26%    11,500 6,500
David 400,000     5,000   15%    20,000 15,000




                                                  23
    DISABILITY PLANNING
• Are you aware of how long you will be able
    to receive benefits?




    DISABILITY PLANNING
• What if your partner
  becomes too sick or
  injured to work?
• How will this
  change the
  management of the
  business?




                   Products
•   Individual Non-Can Disability Insurance
•   Overhead Expense Disability Insurance
•   Retirement Plan Protection DI
•   Reducing Term DI
•   Specialty DI coverages for Key Person
    indemnity




                                               24
  HAVE YOU DONE ALL
 YOU CAN TO PRESERVE
 WHAT YOU’VE BUILT?




         PRESERVE WHAT
          YOU’VE BUILT
• Are your estate planning documents up to
  date and in line with your current
  objectives?




         PRESERVE WHAT
          YOU’VE BUILT
• Do you know how your children or
  other heirs will ultimately be able
  to pay the estate taxes and related
  costs ?
• Will your family be forced to
  liquidate valuable growth and
  income-producing assets?
• Do your plans for disposing of
  your business take taxes into
  account?




                                             25
         PRESERVE WHAT
          YOU’VE BUILT
 • Have you considered state-of-the-art
   techniques for reducing your taxable estate?




                 A Recap…
1. What Is Your Exit Strategy?
2. What Is Your Retirement Strategy?
3. What Is Your Family Income Continuation
   Plan?
4. Do You Have An Up-to-date Buy & Sell
   Agreement?
5. Are You Protecting The Most Valuable Asset Of
   Your Business?
6. The Care & Feeding Of Your Key Employees
7. Have You Done Proper Disability Planning?
8. Have You Done All You Can To Preserve What
   You’ve Built?




       A word about courage…
• Most of us prefer a “maybe” to a “no”—but
   that’s not really productive.
• Ask a “closing question”
   – Which of these subjects shall we attack first?
   – Can we work on this together?
   – Can we get started on this now?
   – Is there any reason we shouldn’t start addressing
     this together---today?
   – Isn’t this a topic we should pursue as soon as
     possible?




                                                         26
 CRITICAL ISSUES FACING
  THE BUSINESS OWNER
       …the end…
            n,
Lanny D .Levi CLU ,ChFC
LANNY D. LEVIN AGENCY, Inc.

  eatng      es es vi    i s ,
Cr i Legaci ,Pr er ng Bus nes es
     di        i
Rewar ng Executves
600 CENTRAL AVENUE
SUITE 333
HIGHLAND PARK, IL 60035
Voice (847) 266-2244 Fax (847) 681-9501
Email: lanny_levin@levinagency.com




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