So You Wanna Sell Buy/Sell or COLI

Jan 2, 2008

  1. James
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    So you want to sell Buy/Sell, part 1

    The market for independent agents with little experience will best be suited within the smaller “Closely-held” businesses or basically the ole’ Ma and Pa shops. Now you have to know something about the “Buy/Sell” options, and how they may or may not apply. Every business with, multiple ownership needs to have a Buy/Sell Agreement, this is undisputed. Yet on the other hand funding these monsters is a story that novels are written about or should be written about.

    So what exactly are the options?

    1. Owner Cross-Purchase Agreement
    2. Entity Redemption Agreement
    3. Mixed Agreement

    Definition of the Buy/Sell for this piece: A Buy/Sell Agreement is essentially an agreement among the owners of a business to allocate control, by means of cross purchase and sale obligations in the event of the death of one of the principals.

    What purpose or reason you can offer up to facilitate the idea of a Cross-Sale Fund in the event of a death of one owner? Basic reason is simple, to set up an orderly transfer of ownership at the death of one owner, as in price and time. Yet, many would say this, that evil-stupid-airhead spouse of any one owner will be destructive! I would be real careful when choosing my words on that reason. Hopefully you don’t have to convince them of the reasons, I suggest in many cases they have a “Buy/Sell Agreement”, just no actual funding of the plan has occurred. I suggest, you to prospect to recently (in the last 3 years) created businesses. I would not attempt this on businesses less then three years of age; basically I would rather spend my time on a business that has some sort of reasonable expectation of being around in the next few years.

    Now, you find yourself in a business with the potential of being a client of yours, obviously if you are planning a proposal for a Buy/Sell Fund you are dealing with a partnership or business with more then one principle or owner. Plus in all likelihood it is a General Partnership or a Corporation of one sort or another. My guess, if it has been in business for three or more years it’s likely to have other (hopefully ignorant and greedy) agents bidding for their business or maybe even an agent already doing business with them, worst case scenario but, not an obstacle that can not be overcome from my experience.


    Now this is an issue most of the so called funding by other agents lack. Personally I don’t like mixing Business Funding and Personal Funding, yet this is the perfect time to get in there and do both! What is the old saying, “Kill two birds with one stone” or in this case with one prospective client.

    To recap, we are now in the stage of the sale you are ready to talk to one of the principals and you really need to convince them on why they should talk to you. I also want to state that I don't believe that a Buy/Sell is the best choice to prospect a business as an initial contact. Yet some here obviously think these plans are easily sold and simple for the Agent, my personal experience is that trying to sell Buy/Sell as an initial offering to the business is rocky at best, not impossible but, not as fruitful as other products esp., for a new agent.
     
    James, Jan 2, 2008
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  2. James
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    Part 2
    Now the above is a clear example of what you will find when you actually go out and start prospecting businesses, at least to one degree or another. Yet in the above we’ll make the assumption that these two businesses are in fact a partnership of some sort, a Dry Cleaner and Restaurant, interesting combo.

    Now let us look at a previous statement I posted:
    From my experience the “When” in the above statement is nearly a certainty in small businesses! So I walk in to the above business (either or) and meet with either Joe the Drycleaner or Bob the Restauranteer, so exactly how to I create a problem with the above plan that they have? First thing is to understand is the fact that most business owners have a large portion of all their funds tied up within their business. First thing that I can think of is, "Transfer for Value".

    Now I advise that they seek counsel on this policy, mainly it is likely a taxable event. The amount as offer in this example of an ordinary Buy/Sell (often found when out there prospecting) seemingly doesn’t take this into account! So the problem uncovered is the tax liability of the second or either owner, he will not have sufficient funding to buy as one would assume he should. I also rarely ever find a secondary policy to cover the owner that may or may not die to properly cover his/her spouse in the event of the sale of the business. I suggest this, the inheritance issue is what I would go for before the Buy/Sell Funding, at least I have a possible sale that will not require multiple people, even though hopefully the other owner is in likely need for a proper inheritance policy.​
     
    Last edited: Jan 2, 2008
    James, Jan 2, 2008
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  3. padthaiforlunch
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    Don't forget the no sell buy-sell.

     
    Last edited: Jan 3, 2008
  4. James
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    Okay, let us get something straight, this is small businesses we are prospecting. Most will not exceed one million in value including "Goodwill" taken into account. Their likely take home is less then $100 grand a year.

    Now sure they can go out and hire Attorney's, CPA's, Financial Consultants and Insurance Counselors. Yea right sure they can!:twitchy:

    A major misnomer being use by some here, these owners likely can not afford or desire to afford or acquire an Attorney, CPA, Financial Planner, if they did I wouldn't be there now would I.

    In other words I seriously doubt these people will give you a second if you start talking "Trust". Maybe in later years, as you develope your relationship you can talk Trust, but for now lets keep it "Real" and more importantly, "Simple".
     
    Last edited: Jan 2, 2008
    James, Jan 2, 2008
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  5. arnguy
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    "Whenever a corporation purchases life insurance on the lives of its shareholders, the proceeds of which are to be used in payment of the stock of any shareholder, the premiums on such insurance are not dividend income to any shareholder, even though the shareholder has the right to designate a beneficiary, if such right of the beneficiary to receive the proceeds is conditioned upon the transfer of the corporate stock to the corporation. These arrangements are commonly referred to as as buy-sell agreements, funded by life insurance....

    However, the shareholders of a corporation will receive a dividend if the corporation distributes the proceeds of a life insurance policy it received as beneficiary upon the death of an insured. In such case, the proceeds lose their exempt status after payment to the corporation."

    The Internal Revenue sources are Revenue Ruling 59-184, 1959-1CB 65, et al, and Revenue Rulimg 71-79, 1971-1 CB 112.


    The above is quoted from Par. 1712 of the 2007 Federal Tax Compliance Manual published by CCH. (Bold and italics are mine.)
     
    arnguy, Jan 2, 2008
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  6. James
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    Yet, the debate rages, is it a liability or a equity? So even if the "Transfer for Value" is not a hurdle in some cases, you have other issues as in "FAS 150". Still again, a great talking point to bring up during the initial contact as a reason for a sit down! As in potential problem that needs to be addressed. The Entity Redemption Agreement, as in your example above would likely get past the "Transfer for Value", yet the specific case here posted earlier is a Owner Cross-Purchase Agreement.

     
    James, Jan 3, 2008
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  7. padthaiforlunch
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    padthaiforlunch Guru

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    So, if the proceeds are used to buy back stock there is no dividend tax paid by the seller, but if the proceeds are distributed without a stock buy-back, the share holder will pay dividend tax?

    If the proceeds are used for purchase outstanding shares from beneficiary, isn't there a capital gain on the sale price above basis?
     
  8. James
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    Part 3

    Okay, so we move on and, you’re out there prospecting, finding problems to talk about and all that jazz. Now, you have an opportunity to work on a Buy/Sell Agreement, of course a promise of the owners/partners that if you can come up with a set of policies (that of course fit price and other guidelines) that fits their desires, they’ll purchase. Hopefully you have other policies pending or issue within this business, not like these agreements materialize overnight! Now comes the question, to you really want too sell one? Some suggest, you need an Attorney, CPA, and Financial Planner and now you’ll need an outside third party appraiser, or three bona fide offers of purchase, don’t know exactly how you go about getting that without offering the business up for sale? Now we are talking about small business, more than likely these players are making around 50-100 grand annually. Not your typical type of person that have all these principals just waiting in the wings. I would suggest if you bring up that idea of all these players (even though it would be beneficial but simply not prudent in most cases), you’ll be laugh at and directed quickly to the exit.

    Now depending upon what kind of business you find yourself in, you’re going to likely hear differing mindsets from the varying owner/owners as in what is and isn’t important. In most cases I come across, I hear how the owners want their families protected. Also remember that the successful business owner has likely had his/her failures in other ventures and understands all to well that things can go wrong. Plus, when I start peeling that onion I also find a lot of desire for the spouse or children to step into their role (one degree or another) when the time comes, sometimes not but, from my experience spouses and grown children are often involved with the business. Remember there are 256 shades of grey, you’ll find that morphed when compared to emotions of business ownership and, how owners perceive the family interest Vs business interest.

    Now personally, I’m biased towards the “Mixed Agreement” allowing the business entity the right of first refusal. As for the funding I rarely find a 100% proceeds from insurance is good or even desirable. Look at this way, as an agent if I die my spouse still receives my “Renewals”, I really like that! In fact she has so much time before she has to be license herself before renewals stop by State Law. Now I’m thinking, if the question is asked (depending upon how) that most owners and this is from experience also that they believe the “Business” owes them some sort of renewal income in the case of their death or disability. So let me recap my product usage in developing a Continuation Plan for any business that keeps the owner and family well protected.

    1. Individual Owners Estate Plan in reference to the business. If this entails all of their Estate Planning, Great! Plus this is fairly quick sale from prospect to issue, at least compared to Buy/Sell and Continuation Plan.
    2. Entity Redemption Agreement, that is base on a Mixed Agreement, in other words the company will have the right of first refusal and the amounts generally are around 25 to 50% of each owner’s share of business. This generally gives the business sufficient money to work out problems in the event of a death or disability of any one owner. Other 50% can be worked out as in “Renewal Income” for the owner if disable or family as a source of income. Or a limited partnership can be pass to spouse of child, of course some options should be allowable if the person wishes full partnership if the company as a whole is agreeable. Or the company can simply buy out the heirs of the deceased owner with a cash agreement.
    3. Mixed Agreement, if there are more then two owners, not that uncommon and the business allows any combination of owners the ability to make individual buy/sell with other owners on an Owner Cross-Purchase Agreement. In other words if the company itself doesn’t seek full interest of any owner wishing to make such an arrangement, another owner can make such an arrangement with that owner.

    Once again, YMMV, whatever the case may be I rarely find that any one product by itself will protect the business and family of the owner or owners very well. This is just a general idea that I find works well and is received with positive feedback. Of course depending upon the owners and their ideas of family and business interest this may change and, change quite significantly but, it does give me a starting position that can be altered.
     
    James, Jan 3, 2008
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  9. Lloydlofton
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  10. slushhhpuppie
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    I don't know about you guys, but if I had a prospect who couldn't afford a CPA I would put some change in his cup, buy him a good meal and be on my way.
     
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