According to the economic research firm, ITR Economics, out of approximately 77 million baby boomers in the United States, an estimated 12 million have ownership in privately held businesses. Roughly 10,000 baby boomers reach retirement age every day, meaning all members of this generation will reach age 65 by the 2030s. This is known as the Silver Tsunami and as this baby boomer retirement era continues and lots of ownership stakes are being passed to the next generation of leadership: an estimated $10 trillion worth of business assets are expected to be transferred. Ultimately, the net worth of individuals over age 55 will exceed $100 trillion and will be passed on to successors and inheritors.
With the record numbers of baby boomers seeking to sell their businesses, many are facing a common problem: they may not have decided on a plan for how they will exit their businesses. This dilemma has forced many boomers to retain ownership and delay retirement. One consequence of this decision will likely be an accumulation of businesses for sale – essentially a ‘fire sale’ given the volume of business owners in the same age group. Cedar Point Financial Services LLC works with business owners and their advisors in establishing a plan as well as designing and implementing funding mechanisms, facilitating the ability of baby boomers to exit their companies on their own terms.
Plan for the Future of Your Business
Approaching succession planning in distinct steps makes it clear to the business owner what needs to be accomplished. Here are the 7 steps Cedar Point Financial Services LLC follows when working with business owners to create a formal succession and continuity plan:
Define the vision for the future of the company and for the owner’s involvement. An owner of a business must know where the business is headed. The plan may involve shutting down the company, because it is dependent upon the unique and non-transferable skills of the owner. Other options may include transferring the company to the next generation or other family members, or, alternately, allowing employees or an outsider to purchase it. Therefore, hand in hand with considering the disposition of the company is the need to understand the exit plan, and what that means to continued operations.
Identify successors. In addition to identifying future owners, consider those who are currently employed by the business, for example, a key manager, or executive. Training, retaining, and rewarding key personnel, or if needed, recruiting new talent should all be seriously considered.
Plan for contingencies. This means planning for “what if” scenarios. What if an owner or other key employee dies or becomes disabled? What if a key employee leaves the company? What if an owner gets married or divorced or has other family members they want to have working for the company? Closely linked to all these scenarios involving personnel are questions about the shares of the company these individuals might hold and what will happen to those shares in any given situation.
Communicate the plan to others. For a succession plan to be effective, it must be shared with those who will be impacted. Successors should know the opportunity ahead. Family and non-family members alike need to understand their roles with respect to the company. These conversations can often be difficult, and many companies hire professional facilitators or attorneys to help conduct them.
Obtain an updated business valuation. An independent appraisal to determine the fair market of the company is useful for both personal planning and business purposes. From a business perspective, the value to each owner is important for buy-sell and key-person provisions, and for funding any liabilities which arise from having to apply those agreements. Personally, the business value influences the estate and retirement plans of an owner.
Formalize the plan by creating or updating supporting documentation which includes:
- Shareholder agreements
- Buy-sell agreements, including trust agreements where there are intra-family transfers
- Employment agreements
- Key-person compensation arrangements (reward and retention programs)
- Power(s) of attorney
In addition, the following records should be collected, well-organized, and easily accessible when needed:
- Will and trusts
- Property deeds/titles, leases, rental agreements, etc.
- Mortgages and notes payable
- Tax returns, financial records and financial statements for the last five years
- Bank account information
- Contact listing of all professional service advisors
- Life and disability insurance and property & casualty policy information.
Implement life and disability insurance to fund identified liabilities arising from the succession plan. Life insurance provides the liquidity to make good on promises made in many of the planning agreements. Under a buy-sell agreement, life insurance (disability insurance) benefitsare readily available to purchase the shares of a deceased (disabled) owner. The same life insurance policy can also be used to provideadditional proceeds to the family of the deceased owner. Even sole owners can benefit from a buy-sell funding by life and disability insurance via a unilateral buy-sell agreement. Many key person executive compensation programs can also befunded with life insurance including nonqualified deferred compensation plans, split-dollar arrangements, and executive bonus agreements.
Ensure a Successful Succession with Life Insurance
In addition to the common use of life insurance to support the execution of a buy-sell arrangement, life insurance can provide immediate liquidity to support a business continuity plan in many other ways. Life insurance can be useful to a business owner in order to equalize the disposition of his or her estate upon death. When a business is left to one or more family members to the exclusion of others, life insurance proceeds can compensate those who do not inherit the family company. For example, if a parent selects one child over another as the successor to own and run the family business, it is easier for the sibling who is not chosen to be compensated equally with cash from life insurance that reflects the value of the business.
Unplanned disabilities can derail the best laid succession plans. Disability buy-out insurance can provide cash to fund buy-sell provisions so that an owner can exit at a market or pre-arranged valuation, and not be in a position to accept concessions from a forced sale due to a disability.
Those businesses which choose to purchase term life insurance instead of permanent coverage may have policies with conversion options. Many term policies allow for the policyholder to convert to a permanent policy without medical underwriting. By converting, this means that the insured will not outlive the policy and the policy can even be integrated into personal planning once the insured has exited the company. In some instances, where a business has been sold and term or some forms of permanent coverage are still in place, it may make sense to sell a policy in a life settlement transaction instead of continuing to pay premiums, lapsing, or surrendering.
The planning specialists at Cedar Point Financial Services LLC help business owners transition the value of their businesses to cash at the time they plan to do so.
Review Annually
Perhaps the most important thing a business owner should understand when faced with creating a succession plan is that the plan will not be set in stone. Just about any element of the plan can be changed as conditions demand. For example, a company which was originally designated to be inherited by children, should be able to be sold to a more qualified buyer, who is also a better fit for the company, especially if an attractive offer is made
Changes should be expected and usually do not create complications as long as they are addressed and are well documented and communicated. Most importantly, any liabilities impacted by changes to a succession plan should be evaluated along with life and disability insurance funding solutions in place to see if existing coverage should be re-positioned or if additional policies are needed. By reviewing a succession plan annually with Cedar Point Financial Services LLC, business owners can be confident that their plans remain on track.
We are Here to Help
The Silver Tsunami has arrived and baby boomers who are business owners will need to decide how and when they will exit their companies. By working with a professional planning team that includes Cedar Point Financial Services LLC, business owners can create a step-by-step strategy that helps them plan for a variety of contingencies. We look forward to helping you plan for a smooth transition that secures your company’s continuity.