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Keeping a Business Buy-Sell Flexible

Have you found a market for the value of your business?

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Two energetic business partners, ages 38 and 49, had just completed a buy-out of the original owner. Started in 1971, the sheet metal contracting business, an S corporation, was responsible for hundreds of loyal and satisfied customers and over 20 hard working employees. The purchase of the original owner's interest was set up as a five-year installment buy-out. The new owners were confident they had negotiated a win-win agreement, but wanted to review the current Buy-Sell Agreement to make sure it was set up correctly.

After meeting with the Woolman Financial Group (WFG) advisors it was determined that there were five obstacles or challenges to overcome. The first issue was the owners had just purchased the building (held as an LLC) that the business was located in, and they wanted to incorporate a buy-out provision for the building as well. Second, their life insurance was not enough to cover a fair Buy-Sell. Third, they were concerned that their families receive fair market value for their business interest and building, should they die, become disabled or retire. Fourth, they had a 401(k) but were frustrated that, as owners, they were limited in the amount they could contribute to the plan. And lastly, they were interested in implementing a selective retirement plan using some funds they had been spending on an installment payment to a retired owner.

The consulting WFG advisor on this case recommended use of a LifeCycle Buy-Sell. The strategy was successfully implemented with the following results: 1) Equalized mortality expense for the insurance funding for both the business and the building, 2) Allowed for customizing the premium allocation by directing it toward the lower cost mortality life, in order to maximize the cash value build up, 3) Centralized the Buy-Sell activation for the business and the LLC within one entity (partnership), 4) Cash values were protected from the rights of personal and corporate creditors (subject to state law), 5) With the partnership, disruption due to divorce on the part of either owner was protected, 6) By building up extra reserves for themselves, they felt more confident they would be able to retire on their own terms versus depending upon someone else to fund their buy-out, 7) Assured tax free receipt of insurance proceeds from the income tax to the beneficiary and the estate tax of the deceased insured, and 8) Partnership also purchased Disability Buy-Out coverage. The partnership was the owner and beneficiary of both the Disability Buy-Out and life insurance policies.

After implementing this strategy the two owners plan on meeting once a year to value the business and the LLC and update the insurance coverage as needed. This might alleviate issues regarding the value of the business and the LLC for estate tax purposes and heirs questioning the real value of the two entities.

If you own a business and you have other shareholders or partners please consult with a WFG advisor to see if the LifeCycle Buy-Sell strategy is a suitable solution for your situation.

(This story has been altered for confidentiality.)

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**Life Insurance products contain fees, such as mortality and expense charges, and may contain restrictions, such as surrender periods. Please keep in mind that the primary reason to purchase a life insurance product is the death benefit. Guarantees are based on the claims paying ability of the issuing life insurance company.

**Financial advisors do not provide specific tax or legal advice. You should consult your specific tax or legal professional regarding your specific situation.