Buy-Sell Review. Marketing Guide

Transcription

1 for Financial Professionals Buy-Sell Review Marketing Guide

2 Is your client s buy-sell agreement up to date?

3 The need and opportunities Buy-Sell Review is a free service from the Principal Financial Group that draws on our expertise in providing solutions for the needs of business owners and executives. As businesses change and grow, the existing buy-sell agreement may no longer meet the needs and goals of the owners. A buy-sell agreement can be affected by both tax and regulatory changes, and a review of the plan can help reveal if there is a problem. A buy-sell agreement is not effective if the players have changed. Changes in the business structure, valuation, personnel and even the owner s family can make a buy-sell plan outdated or counterproductive. A Buy-Sell Review can help your client enhance the stability and value of a closely held business. When you request a Buy-Sell Review, our Advanced Solutions team will provide you the following materials to present to your client: A summary of issues and recommendations regarding the existing buy-sell agreement. An analysis of any buy-sell funding needs. An informal valuation of the business. The Summary and Analysis opens opportunities to present solutions that can help fill any gaps in your client s buy-sell strategy.

4 Client interview script This script is intended to get clients thinking about updating their existing, and often underfunded, buy-sell agreement and/or insurance funding. 1. Set up the issue (Name), thank you for taking the time to discuss your buy-sell agreement. I recognize business planning is ever changing. My experience with owners of other closely held businesses has been that they are worried the business may not generate enough cash flow to buy out a partner who dies, becomes disabled or retires. You are to be complimented for taking the time to consider your business buy-sell planning needs. This may be the right time to take a fresh look at any gaps that may have been created in your buy-sell plans. 2. Create interest in the benefit to be offered We can help with your review process. The Principal Financial Group, a nationally recognized Fortune 500 company, offers a free service called the Buy-Sell Review I believe you will find this very helpful. This Buy-Sell Review gives you an opportunity to tap into the expertise of the Advanced Solutions team at The Principal to review your business valuation, buy-sell plans, and buy-sell funding all at no charge to you or your business! If I can obtain some information from you, which of course will be kept strictly confidential, our team will prepare a set of reports, which include: A summary of issues and recommendations with regard to your existing buy-sell agreement, An analysis of any buy-sell funding needs, and An informal business valuation. The Buy-Sell Review highlights the key issues of your buy-sell agreement, and provides a starting point for discussions with your tax and legal advisors either to address potential issues or confirm that your agreement is up-to-date and meets your current objectives. The review does not provide you with a legal opinion as to the legal or tax implications of your agreement or to the appropriateness of any funding strategies. The Principal cannot provide you with any legal document or revise existing legal documents. The valuation will not be a substitute for a formal valuation nor establish a value for tax purposes. 3. Offer the Review Just by completing the Request for Review form and submitting the necessary documents; I can provide you a review of your buy-sell agreement generally within 15 business days. (Name), would you like to start the free review process by going through the request form with me today?

5 Questions to ask the business owner This list of questions is not comprehensive, but is intended to help clients understand the need to review their buy-sell agreement. Please note that these questions are for discussion purposes only and are not intended as a substitute for a review by the client s legal advisor. Buy-sell structure 1. Have you incurred any recent changes in the value of your business or in the make-up of your business or family since your buy-sell was drafted? Significant changes in operations or methodology can make the valuation clause or the entire agreement obsolete. 2. Has your business entity type changed since the agreement was drafted? Making or terminating an S election or converting to an LLC (Limited Liability Company) impacts which type of buy-sell agreement may be most appropriate. 3. Are all current owners party to the buy-sell agreement? Have you given an employee or family member stock? 4. Have the business owners considered the estate planning implications of the buy-sell agreement? We recommend you also consult a CPA or valuation expert. 5. When did the client s attorney last review the agreement? The agreement should be reviewed any time changes in ownership, entity type, or tax laws occur, or upon the acquisition/creation of a new line of business. In any case, the client s attorney should periodically review the agreement. Buy-sell funding 1. Is the agreement funded with life insurance and disability buy-out insurance? If so, is additional coverage required? Do you need to convert term to permanent insurance? 2. If life and disability insurance have been purchased, has policy ownership been coordinated with the buy-sell agreements? For a cross purchase agreement, each owner should own insurance on each of the other owners. For an entity purchase agreement, the entity should own the policies on each owner. Generally, the owner and beneficiary should be the same unless a special agreement is in place. 3. Does the definition of disability in the buy-sell agreement match or refer to the definition of disability in the disability buy-out policy? If not, there could be a mismatch in timing or amount between the buy-sell obligation and the policy. Often the agreement triggers call for a payout, but the policy is designed to pay under the policy trigger, which may be quite different. An elaborate, expensive and drawn-out process to determine if an owner is disabled bypasses the simplicity and low-cost approach of using the definition in the disability buy-out policy. 4. Is there a mismatch between the direction of the buy-sell agreement and the ownership/beneficiary designations of the life and/or disability buy-out insurance policies funding the agreement? Death benefits may be inappropriately included in the insured s estate or may be taxable income to the recipient.

6 Business valuation 1. Were appropriate measures used to set the purchase price of the stock or membership interest? Many agreements use book value, which rarely provides a realistic, fair price and is particularly problematic from a tax standpoint in the case of family businesses. Book value is not acceptable to the IRS, nor is the amount of the insurance purchased. 2. Does the agreement state that shareholders will set the buy-sell price at an annual meeting? If so, when was such a meeting last held? Are the owners comfortable with the price? Is there a back-up provision? 3. Does the agreement address how life insurance is treated in valuing the business? Generally, an entity purchase plan should exclude death benefits from the purchase price. (Policy cash values are normally considered in valuing a business.) A cross purchase agreement stating that the minimum value is equal to the life insurance death benefit can create problems. 4. Have the owners reviewed the valuation formula recently? If so, do they still think it makes sense? Overly complex formulas are difficult for the parties to understand and may not capture an appropriate valuation. We recommend you include a mechanism for timely and continuous updating of the business value. More drafters are moving to an annual setting of the value for buy-sell purposes process by making valuation a required agenda item for annual entity governance meetings. Process guide Access the following materials at STEP 1 PRE-APPROACH Listen to a brief Brainshark presentation, Opening cases with a Buy-Sell Review (BB 10101), to learn more about what Buy-Sell Review is and how it can help your clients. STEP 2 APPROACH Send Approach (LF 71), Approach Letter (BB 9874) or Approach Mailer (BB 9872) to business owner clients and prospects to introduce them to the Buy-Sell Review and encourage them to contact you to discuss a free Buy-Sell Review.

7 STEP 3 INITIAL MEETING Review the Business Owner Summary (BB 9852) with the business owner to explain the need for review and the process. Show the business owner a sample Buy-Sell Review Summary and Analysis (BB 9868) to illustrate the extent of the review. STEP 4 REQUEST FOR REVIEW Complete the Request for Review (DD 2716) form. Instructions for submission are found on the form. STEP 5 REVIEW Study the customized Buy-Sell Report presentation materials prepared by Advanced Solutions staff. The Review presentation has two components that are based on the client documents submitted: Summary and Analysis and Business Valuation. Refer to Business Owner and Executive Solutions Producer Guide (BB 9582) for details about our entire suite of solutions and the tools available for each. Look through the Financial Security Review Marketing Guide (BB 9685) to prepare for the funding review with the client. STEP 6 PRESENTATION Go through the customized Summary and Analysis with the client to cover the highlights and recommendations. Recommendations section may identify sales opportunities for you to help the client meet business goals. Go through the customized Business Valuation, if included. Review funding with client. Offer to review any existing insurance coverage. Offer life insurance and Disability Buy-Out Insurance from the Principal to help fill any gap(s) in their existing coverage. FOR MORE INFORMATION Go to or contact the National Sales Desk at

8 WE LL GIVE YOU AN EDGE Principal National Life Insurance Company and Principal Life Insurance Company, Des Moines, Iowa , Insurance products from the Principal Financial Group (The Principal ) are issued by Principal National Life Insurance Company (except in New York) and Principal Life Insurance Company, Des Moines, IA While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that The Principal is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. Not FDIC or NCUA insured May lose value Not a deposit No bank or credit union guarantee Not insured by any Federal government agency BB /2010 # Do not use after 04/2011