Small businesses have overlooked needs that affect not only the business owners and employees but also the owners' families. A big need is the business continuity for the owners, partners, stockholders, and the families involved.
For producers who either know a lot about business insurance or want to help their prospects who may be exposed to this issue, a great way to start the conversation is to ask a prospect what he or she wants to happen to the business when he dies. There are three basic options:
1. Keep it.
2. Sell it.
3. Liquidate it.
The producer can look at each of these options with his or her prospects by asking effective questions, as shown in the following questions.
Producer: "One option is to keep the business in the family. Is that a possibility?
"Another popular option is to sell the business as a going concern. Would you want to sell your share of the business to the other owners and have them buy out your family members?
"The third option is to close the business and sell the assets for cash. How does that sound to you?"
Depending on the answers he receives and what kind of business is involved, the producer might skip some of the questions and ask others.
There are issues surrounding each option. If the business owner would like a family member to retain the business, the producer can explore this option by asking the following questions:
o Which family members would you like to own your share of the business?
o Who would run the business on a day-to-day basis in your place?
o Have you talked to him or her about it, and is he willing and able to run the business?
o Are your heirs and the surviving owners compatible?
o Do your creditors know about your plans, and have they agreed to maintain their business credit account with someone else in charge?
o How much annual profit or loss do you estimate in the next five years?
o Would you want to guarantee these profits to your family, and if so, for how long?
o Would your death cause other outstanding monetary needs?
If the prospect says he wants to sell the business, the producer can explore this issue with these questions:
o To whom would you sell your share? Are they willing to buy?
o What would the price and payment terms be?
o How will it be funded?
o Would the buyout be a legally enforceable agreement?
Finally, if the prospect wants to liquidate the business and sell the firm's assets, the producer should ask such questions as:
o For how much would you sell the business today?
o How much would the company lose in a forced liquidation versus for what it would have sold as a going business?
o Do you have any other business-related debts? Do you want to pass them along to your heirs or eliminate them at your death?
o What arrangements have you made to see that your objectives are carried out?
"What do you want to happen to your business when you die or retire?" is a great question to start the conversation. The producer can use this question when making cold calls, talking to existing clients who have a business, or meeting with business clients who have insurance with him but no life insurance yet.
While these questions have addressed the three options available to business owners upon their deaths, the solution they choose creates additional problems for their families and other business partners.
Owners need to protect their stakes in their businesses, so this is a common opening in the market. Small business owners readily see the need to provide a source of cash to retain the business should the unexpected happen to a business partner. But few producers carry this concept to the next step; by failing to do so, they miss a golden opportunity for additional sales.
An effective solution to these problems is a buy-sell agreement. Buy-sell agreements fall into one of two categories: cross purchase or entity purchase.
In either case, at the death of a business partner, the remaining partners are left with a larger share of the business. While positive from the business continuation point of view, the final result of a buy-sell agreement may be a significant estate taxation problem for the surviving owner, whether the business started with two owners or 10.
If the buy-sell concept is played out to its final conclusion, the business's entire value will appear in the estate of the last owner to die.
Let's look at an example, a two-owner wholesale plumbing business.
When the business was incorporated as a C corporation 30 years ago, each owner invested $12,000. Through the years, each has invested another $25,000 of his own money, and they have reinvested most of the corporate earnings.
The business today is valued at $2.15 million, employs 39 people, and has an excellent reputation. Both owners have children. Owner One has three daughters, none of whom is active or interested in the business. Owner Two has two sons, one of whom is active in the business.
As the business grew, the owners entered into an entity purchase buy-sell agreement. They have kept the insurance coverage up to date so that the business insures each of them for $1.1 million. If either dies, the business will purchase his share and retire the stock, leaving the surviving owner as the company's sole owner.
In this scenario, although some planning is needed, the first to die can avoid significant negative estate tax consequences.
The survivor, however, will not be so lucky. The survivor will own the entire business, making his gross estate at least $2.15 million, an amount that almost guarantees significant estate taxation.
How should each owner plan? If they plan only for their current shares of the business, one of them will be caught short. Both need to plan as if they will be the survivor, and this creates an opportunity for insurance sales. The statements the producer makes should move him toward a sale.
Producer: "Owner One and Owner Two, you've taken an important step in protecting yourselves, your families, and each other through this buy-sell agreement. It's something that every business owner should do, and I'm glad I was part of helping you put it into place.
"There is one other thing that I should explore with each of you personally. That's what will happen to the survivor's estate. In fact, I should talk to both of you about your personal estate planning and what will happen if you are the survivor."
As we have seen, both owners need to do some estate planning to make sure that no more than necessary is lost to estate taxation.
So what option does the survivor have?
He can sell the business, but this creates problems of its own. It will lead to capital gains tax on the $2.15 million gain in the business and will leave the balance in the survivor's estate.
The capital gains tax problem would improve if their buy-sell agreement were a cross-purchase instead of an entity-purchase plan, but a significant amount of tax still would be due at the business's sale. And selling the business does not solve the estate taxation problem; it simply switches one asset, the business, for another, cash. Either way, by selling or holding the business, the survivor of a buy-sell agreement will have the whole business's value in his estate.
This is where the producer can explain what he means and then schedule a personal appointment with each owner.
Producer: "One of you ultimately will wind up with the full value of the business in your estate. We don't know which one that will be. We do know that when the entire value of the business is in either of your estates, it will create an estate taxation problem. The unlimited marital deduction may defer the taxation, but there ultimately will be a problem unless you do some planning.
"I have some ideas on how you each can address that problem, and I'd like to share them with you. Owner One, would Wednesday morning or Wednesday afternoon be better for you?"
There's no question that a buy-sell agreement was the right choice for these owners. But did it go far enough?
Without additional planning, one of these owners will carry the weight of the estate taxation for both, and the producer working the case will have missed a golden opportunity. The buy-sell policies created the need for each owner to plan for the eventuality that he would be the survivor, opening the door for estate planning. One creates the opening for another companion sale, and that is total needs selling.
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