1. Managing the “What-If’s” — Establishing a Business Succession Plan
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Managing the “What-If’s” — Establishing a Business Succession Plan
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ALR2567 (10.16)

2. WELCOME [Greet the audience and thank them for attending] Welcome!
As a personal risk manager, I [we] often have to share some uncomfortable facts and statistics with people. And today is no exception. But thinking clearly about the risks – or “what-ifs” – you face as a business owner is often the first step to getting on a positive path to risk-proofing your business. And that’s the good news.
But let’s start with some challenging questions that concern your business as a whole.

3. The First Big “What-If”?
What if you weren’t there to run your business?
Who would take over if you were to die, become disabled or retire?
Would your family want to participate in it or prefer to cash out?
Would customers go elsewhere?
Would key employees look for other opportunities
What if you weren't’t there to run your business?
Who would take over if you were to die, become disabled or retire?
Would your family want to participate in it or prefer to cash out?
Would customers go elsewhere?
Would key employees look for other opportunities?

4. The Next Big “What-If”?
What if a co-owner or partner was to die, become disabled or depart?
Would you want to work with their spouse or children?
Would you lose time and money trying to find a qualified replacement?
Would there be a significant loss in company revenues?
Another big “what-if” question is relevant if you have a co-owner or partner in the business:
What if a co-owner or partner was to die, become disabled or depart?
Would you want to work with their spouse or children?
Would you lose time and money trying to find a qualified replacement?
Would there be a significant loss in company revenues?
As overwhelming as these “what-if’s” might be, there are ways to deal with them – all it takes is some planning. I have several strategies I’d like to share with you today that can help solve some of these critical issues of business survival.

5. Allstate brings complete protection solutions – specific to your unique needs
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For you - the owner
For the business
For your employees
We are your “one-stop” protection resource – from financial services, voluntary benefits, business insurance, to property & casualty. Now let’s talk a little on how you can protect you, your family and your small business.
Business Succession Planning
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6. Allstate Benefits
Allstate Benefits is focused on supplemental health insurance and voluntary benefits.
Their voluntary benefits include:
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Allstate Benefits is focused on supplemental health insurance and voluntary benefits. With Allstate Benefits, employees can protect their savings from a major health event, accident or life event. Our coverage allows customers to take control of their illness or injury and not the other way around.
An excellent way to improve employee retention and help control business and personal health insurance costs, is to enroll in one or more of our voluntary products. These products can help cover some of the out-of-pocket costs not covered by traditional medical insurance.
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7. Allstate Business Insurance
Allstate Business Insurance (ABI) provides guidance and tools to protect your business in every stage including:
Financing and Fund Acquisition
Navigating Government Regulations
Understanding Healthcare Reform
Improving Technology
Building the Best Team
Attracting New Customers
Allstate agencies are prepared to help with commercial business owner insurance, liability insurance, umbrella coverage, and more. And beyond insurance, your Allstate agency can pull together the big picture with important information and resources to expand your knowledge and keep your business growing, including:
Financing and Fund Acquisition
Navigating Government Regulations
Understanding Healthcare Reform
Improving Technology
Building the Best Team
Attracting New Customers

8. Allstate Life and Retirement
Allstate Life and Retirement solutions can help develop a range of risk management strategies and contingency plans including:
Business Protection for Loss of Key Employees
Life Insurance
Business Succession
Buy/Sell Strategies
Family Business Transfers
Retirement Planning
Estate Planning
Life insurance is one of the best ways to ensure that a business can continue if something happens to you or any of your business partners. Your Allstate agency can help provide security for your small business with customized ways to make sure your business has the best chance to recover and continue to thrive.
With Allstate Life and Retirement solutions, your Allstate agency can help develop a range of risk management strategies and contingency plans, including:
Business Protection for Loss of Key Employees
Life Insurance
Business Succession
Buy/Sell Strategies
Family Business Transfers
Retirement Planning and
Estate Planning
Now, let’s talk about a few strategies that can help your business.

9. Strategy #1: Create a Business Succession Plan
Provides orderly ownership transition
Prevents forced liquidation of business
Minimizes valuation disputes
Minimize estate taxes
Prevents legal action among family members or co-owners
Provides estate liquidity for family
The first strategy is to create a business succession plan. It allows for an orderly ownership transition that helps ensure the continuation of the business.
It also:
Prevents forced liquidation of business
Minimizes valuation disputes
Prevents legal action among family members or co-owners
Provides liquidity – or needed cash – to the family from the estate

10. What Type of Plan is Needed?
Want to keep it in the family?
Designate in an Estate Plan
Want to sell to a co-owner, third party — or competitor?
Establish a “Buy-Sell Agreement”
KEEPING IT IN THE FAMILY?
In most cases, where family members are involved, the transfer of the business can be accomplished using a combination of sales and gifts as designated in a personal Estate Plan. Since buyers rarely have sufficient cash, or access to other assets, installment sales rather than outright sales are usual. 1) An installment sale is also a way of providing some retirement income to the owner. Such sales are usually designed so that the payments will be made out of company income. This reduces the burden on the buyers, but will probably severely restrict their ability to take additional compensation at least in the early years when the payments are being made.
2) If gifts of business interests are to be made, then it may be desirable to use different classes of interests. This is particularly useful if the older generation wants to give away value while retaining control, or if business interests are to be given to all children, but only voting interests are given to those involved in the business.
SELLING TO A CO-OWNER OR THIRD PARTY OR COMPETITOR?
Buy-Sell agreements should be used whenever the business owners want to ensure that their interests will be transferred to the other co-owners or to a specific person or persons. These agreements will prevent the sale of interests to third parties without the consent of the remaining owners and can also provide the terms under which non-participating family members have the right (or are required) to sell their shares back to the company or to a surviving partner.
If only one child is getting the business should that child be required to “buy” the business from his or her siblings or other owners? It usually depends on the value of the business compared to the other assets in the estate and whether or not the child has a lot of sweat equity in the business.

11. What is a Buy-Sell Agreement?
Legal agreement that guarantees a buyer and a way to value the business
Commonly funded with life insurance that provides liquidity for cash purchase
Most common types: cross purchase or entity purchase
A buy-sell agreement is a legally binding contract in which one party (the owner) agrees to sell and the other party (an individual or business entity) agrees to buy an ownership interest in a business. The buy-sell agreement should be drafted in consultation with legal counsel and tax advisors.
A properly drafted buy-sell agreement establishes a price for the business, provides the cash for funding and guarantees a purchaser for the business interest.
Events which may trigger the sale include: Death, Disability, Retirement, Voluntary or involuntary termination
Typically funded with life insurance that provides the cash for immediate purchase – since most owners do not have the necessary liquidity to manage a purchase on their own.
The most common types of buy-sell agreements are a cross purchase and an entity purchase.

12. The Importance of Business Succession Planning
Buy-Sell Method: Cross Purchase
Policy
Life Insurance Company
Agreement
Owner A
Owner B
Business
Premiums
To give an example of how it works, this is what a funded cross purchase agreement looks like:
Each owner purchases, owns and is sole beneficiary of an insurance policy on the life of the other owner.
The policy owner collects the death proceeds from the insurance company and uses the funds to purchase the business interests of the decedent.

13. Benefits To Owner Guaranteed buy-out at death, retirement, disability
Value of business in immediate cash to the family
Can provide needed liquidity for the estate

14. Benefits To Employees Job/income stability — keeps business running
Retirement income protection — keeps savings and retirement plans intact

15. Benefits To Heirs
Guaranteed source of immediate cash to pay estate taxes and other expenses
Not dependent on success of business for livelihood
Receive fair value for stake in company
Promotes family harmony
In the event the first business owner dies, the deceased owner’s estate still owns a policy on the surviving owner. The surviving owner can buy the policy back from the estate for fair market value.

16. How Should It Be Funded? Sinking fund Borrow money from bank
Installment sale to deceased owner’s estate
Personal funds of buyer
Life insurance
Developing a business succession plan is great – but if it is not funded, then your family will likely be dependent on the continued success of the business in order to receive what they need to live on – in the form of periodic payments for the business interests. That is precisely the situation that you are trying to avoid when you set up a succession plan.
So the next question is – how can a buy-sell agreement be funded and which is the most cost-effective method?
Life insurance is the most effective way to fund a buy-sell agreement, but let’s consider the alternatives first, which may be considered if the business owner is no longer insurable or the cost of life insurance is considered to be unreasonably high:
Sinking fund - Possible accumulated earnings tax problem and no protection if premature death
Borrow money from bank - Credit worthiness may be impaired by death of owner
Installment sale to deceased owner’s estate - Family now dependent upon success of business
Personal funds of buyer – often not feasible, may be difficult to obtain
Life insurance – the reason that it is one of the most effective mechanism of funding a buy-sell agreement is because it can provide the cash exactly at the time that it is needed.

17. Strategy #2: Provide Key Employee Protection .
Key person life insurance protects your business from financial loss due to death of key employees:
Cost of replacement
Cost of training
Replace lost earnings
Reduce creditor concerns
Now that we’ve talked about the value of life insurance for a buy-sell agreement, let’s take a look at another key risk that life insurance can help resolve: Does your business have a key employee whose departure could have serious financial consequences for the business?
Then you will want to consider our #2 strategy for protecting your business:
Key person life insurance.
It is one of the easiest business continuation planning strategies to implement – and can be used to protect you from financial loss if a key employee or partner should depart the company.
We don’t often think of the true cost of losing someone valuable to the business, but here are several examples:
Cost of replacement
Cost of training
Cost of replacing lost company earnings
Cost to reduce creditor concerns over business continuity
Here’s how it works…

18. Business Succession Planning
Insurance Company
Business purchases insurance
on key employees
Income
tax-free
death benefits1
Premiums
The business purchases insurance on a key employee, pays the premiums to the insurance company and may receives tax-free death benefits upon the death of the insured.
It is these death benefit payments that can help cushion the financial impact of the loss of the key employee.
The IRS mandates specific requirements that the employer notify the individual about the insurance, secure his/her written consent and submit annual reports to the IRS.
Employer must issue a Notice & Consent to the employee/insured; business accountant needs to file an additional tax return form annually with the business’ income tax return as well as additional recordkeeping.
The IRS mandates specific requirements that the employer notify the individual about the insurance, secure his/her written consent and submit annual reports to the IRS.

19. Helping to Protect Your Most Valuable Asset
Next Steps
Determine which areas are your greatest need: business, personal and/or employees
Make an appointment for a free protection review and proposal for your small business
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20. Disclosures
This material is intended for general educational purposes only.
1Death benefits and tax-deferred cash accumulation may be subject to the corporate Alternative Minimum Tax (AMT). The Pension Protection Act of 2006 limits the death proceeds an employer can exclude from income when insured does not meet the definition of a highly compensated employee or of a highly compensated individual. The Act also imposes specific requirements that the employer notify the individual about the insurance, secure his/her written consent and submit annual reports to the IRS.
Life insurance offered through Allstate Life Ins. Co. & Allstate Assurance Co., 3075 Sanders Rd, Northbrook IL ; Lincoln Benefit Life Co., 1221 N St. Ste 200, Lincoln NE 68508; American Heritage Life Ins. Co., American Heritage Life Dr., Jacksonville FL   In New York, life insurance offered through Allstate Life Insurance Company of New York, Hauppauge NY.
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ALR2567 (10.16)