1. DOES THIS CONCERN YOU? BUY SELL SITUATIONS
No bank or credit union guarantee | Not a deposit | Not FDIC/NCUA insured | May lose value | Not insured by any federal or state government agency
Guarantees are dependent upon the claims-paying ability of the issuing company.

2. OVERVIEW
NO BUY SELL 1
UNFUNDED 2
UNDERVALUED 3

3. NO BUY SELL
Should you be concerned if you, your co owners and your business don’t have a business succession plan in place?

4. PROFITS YOUR FAMILY PRODUCTS AND SERVICES Income Benefits
BUSINESS COSTS
Business Value
In most business there are at least 4 key components that make it work and make it worth your while.
The key element of your business is you and your co – owners and perhaps some key employees. You make your business go – your vision – your money.
Every business has costs – controlling those costs, making sure that the money spent helps your bottom line will be a major component of decisions you make.
You have a product or service that you provide.
And finally, what we all hope for and strive for is a profitable business.
These components are only one part of the story. They make up a dynamic, energized entity. And most of the time it is your dedication and hard work that helps to make this work. For most people, their business is important in their life and in the life of their family. Let’s look at how your business impacts your family and your family’s financial balance sheet. The business provides you and your family with income, benefits and the value of the business itself.
We’ve added a basic balance sheet – with assets and liabilities. On top, you see income that flows onto your personal balance sheet. For most business owners it is this income that the family uses to live on and play on. Also, you see that there are benefits that the business may be providing to you - health insurance, or a car – things like that. Finally, note the value of the business – it is a capital asset that’s on your balance sheet – one that you could sell and convert to cash. This is all from the business you built.
In the here and now, this movement of income, benefits and value builds stability and protection for you and your family. But what happens to this picture if something happens to you or one of your partners?
OWNERS / KEY PEOPLE

5. ? OWNERS / KEY PEOPLE YOUR FAMILY Income Benefits Business Value
What if you had died yesterday? Of course the emotion of the situation is profound, but the financial situation is vital to consider. With you gone, the income from the business will likely stop. The benefits may terminate. What your family may look to is the business as an asset, but what do they do with that to convert the asset to cash? They may look to the business, your partners or strangers to convert the asset to cash. But at what value and in what time frame?
LOOK TO..
The Business
The Co-Owners
Strangers

6. AT THE SAME TIME
At the same time your family is looking to the business and your partners about financial concerns, what’s happening to the business and surviving owners?

7. ? PROFITS YOUR FAMILY PRODUCTS AND SERVICES Income Benefits
BUSINESS COSTS
Business Value ?
Things aren’t likely to remain the same in the business. You’re a key person and you’re gone. That shrinks the talent running the business. Will costs increase - - particularly if the business has to incur a significant debt to buy the business interest from the family. The business’s ability to serve its clients may decrease. And, in the face of all these new costs will the business’ profits significantly decrease?
OWNERS / KEY PEOPLE

8. YOUR BUSINESS YOUR FAMILY
The bond between your business and your family can easily tear apart and all parties can suffer financially.

9. NO BUY SELL… DOES THIS CONCERN YOU? NEXT STEPS
These are the things that can happen when you have no business succession or buy sell plan in place. Does this concern you?

10. An Unfunded Buy Sell… Should This Concern You?
Should you be concerned if you, your co owners and your business have an unfunded buy sell -plan in place?

11. PROFITS YOUR FAMILY PRODUCTS AND SERVICES Income Benefits
BUSINESS COSTS
Business Value
You have a buy sell and that’s great. But, you haven’t created a funding plan – maybe you’re relying on installment payments or an outside loan to pay for the buy sell.
Let’s spend just a few minutes visiting about this. Unfunded buy sell agreements are a gamble that the economic stars will be in your favor when a buy sell is triggered. It is understandable why people are willing to take that gamble – some people are comfortable with a relatively high level of risk. But it’s important to have a clear understanding of what those risks are.
Here you see the elements of a typical business – with each part representing vital elements of practically every business.
1 The base of the business – the cornerstone, is you and your co – owners. Sometimes there are other key employees.
2. Every business has costs of running the business and, of course you are providing a product or service.
3. And, ultimately, we all hope for profits.
These boxes aren’t separate pieces of a puzzle. They make up a dynamic, energized entity. And most of the time it is your dedication and hard work that helps to make this work. For most people, their business is important in their life and in the life of their family. It provides you and your family with income, benefits and the value of the business itself. In the here and now, this movement of income, benefits and value builds stability and protection for you and your family. Part of what we do is help you to look at how this picture might change if something happened to one of the pieces that makes up the business. We test the different ways to stabilize and protect your family and your business against potential economic losses due to a death or a disability.
I’ve seen many clients with a self insured or installment buy sell. Let’s walk through what might happen where there is a self insured or installment buy sell.
OWNERS / KEY PEOPLE

12. OWNERS / KEY PEOPLE YOUR FAMILY Income Benefits Business Value
Let’s assume one of your co owner’s died yesterday.
A few days after the funeral, you get a call from the surviving spouse. She asks you about finances – what did the company owe the family in salary, how long would the health insurance last and how much would it cost? You answer as best you can and remind her that there is a buy out agreement and you will get her the details ASAP. Put yourself in the family’s shoes – income has stopped, benefits have stopped (or will stop).

13. AT THE SAME TIME
At the same time the suriving family is looking to the business and you and your partners about financial concerns, what’s happening to the business and surviving owners?

14. ? PROFITS YOUR FAMILY PRODUCTS AND SERVICES Income Benefits
BUSINESS COSTS
Business Value ?
Things aren’t likely to remain the same in the business. A key person is gone. That shrinks the talent running the business. Costs will increase - - particularly if the business has to incur a significant debt to buy the business interest from the family. Your ability to serve your clients may decrease. And, in the face of all these new costs will your profits decline.
And now, we have to add this new debt – the cost of paying for the buy out.
It is in this environment that the business (or co owner) now has to self fund or borrow from the bank or surviving family to complete the buy sell agreement. So think about it – Can you borrow at that moment? At what cost and for how long. Will the new debt impair the business’ ability to get money to operate the business? And of course, as a business owner you know that the true cost of an arrangement is not just the check you write, but what you had to earn to have the money to write the check. If you need to pay a dollar, what did you have to earn to have that dollar? Also, the cost of an installment arrangement (or borrowing) will often be higher than other funding techniques. An installment buy out is not a not dollar for dollar arrangement, it is a dollar plus arrangement. Why? Because borrowing money, either from the bank or the family, requires the payment of interest. That interest is money out the door that you can’t ever get back.
That’s a lot going on at the business and personal level for the surviving owner. And for the surviving family? They’re going to have to be patient and wait for all the money to be paid out. And what if the business can’t meet the obligations? The income from the business is gone, the benefits are gone and maybe the value of the business is gone too.
These are the risks that are in place in your arrangement right now. Maybe, that’s the best plan for you – but maybe not. What we do is take a look at the funding decisions you’ve made, stress test them and see if they are the most appropriate funding tactic for you.
profits significantly decrease?
OWNERS / KEY PEOPLE

15. AN UNFUNDED BUY SELL…
SHOULD THIS CONCERN YOU?
NEXT STEPS

16. AN UNDER VALUED BUY SELL… SHOULD THIS CONCERN YOU?
In this Advanced Concepts on a a Yellow Pad we discuss the challenges of an under valued buy sell.
AN UNDER VALUED BUY SELL… SHOULD THIS CONCERN YOU?

17. $500,000 $1,000,000 PROFITS YOUR FAMILY PRODUCTS AND SERVICES Income
Benefits
BUSINESS COSTS
Business Value
$500,000
This concept assumes that you have a buy sell and that’s great but you feel the actual value of the business is higher than what is set in your buy sell.
There are certainly reasons that valuations in the agreement may be different than the actual value of the business. Consider the impact of undervaluing a business. Undervalued buy sell agreements are a little like a shot in the dark – a gamble that the IRS won’t care and that it won’t matter to you or your family that you’re getting less than fair value. It is easy to understand how the situation arises – sometimes it’s intentional and sometimes the buy sell agreement just doesn’t keep up with business’ change in value.
Here you see the elements of a typical business – with each box representing vital elements of practically every business.
1 The base of the business – the cornerstone, is you and your co – owners. Sometimes there are other key employees.
2. Your business provides some form of services and products.
3. Not every business has what we some times call rank and file employees. Every business has costs associated with doing business.
And, ultimately, we all hope for profits.
These boxes aren’t separate pieces of a puzzle. They make up a dynamic, energized entity. And most of the time it is your dedication and hard work that helps to make this work. For most people, their business is important in their life and in the life of their family. It provides you and your family with income, benefits and the value of the business itself. Let’s add this to the picture – clicking through.
We’ve added a basic balance sheet – with assets and liabilities. On top, you see income that flows onto your personal balance sheet. For most business owners it is this income that the family uses to live on and play on. Also, you see that there are benefits that the business may be providing to you - health insurance, or a car – things like that. Finally, note the value of the business – it is a capital asset that’s on your balance sheet – one that you could sell and convert to cash. This is all from the business you built.
In the here and now, this movement of income, benefits and value builds stability and protection for you and your family. Part of what we do is help you to look at how this picture might change if something happened to one of the pieces that makes up the business. We test the different ways to stabilize and protect your family and your business against potential economic losses due to a death or a disability.
Let’s walk through a hypothetical situation.
In this case, there are two owners and let’s say their business today is worth $1,000,000. They won’t sell it for a penny less than that. So, on their personal balance sheet they each list the business at $500,000 of value. If they sold the business the $500,000 capital asset becomes cash of $500,000 (not considering taxes).
OWNERS / KEY PEOPLE
$1,000,000

18. OWNERS / KEY PEOPLE $500,000 YOUR FAMILY Income Benefits
Business Value
What might happen if one of the owners died yesterday. The surviving family is concerned about a lot of things. There is no income coming in from the business and no benefits. But there’s still the matter of the business interest – which, of course he knows was listed on their personal financial statement at $500,000. After a little while the surviving owner and the surviving family meet to figure out what happens next.
$500,000

19. OWNERS / KEY PEOPLE $500,000 $125,000 LAWSUIT YOUR FAMILY Income
Benefits
Business Value
LAWSUIT
The surviving owner has dug up the buy sell agreement. The two owners hadn’t looked at the agreement in the last few years and our surviving owner discovered that the agreement set the value of the business at $250,000. So, the family is owed $125,000 and not $500,000. This is a legally binding agreement - think about what just happened to the family. There’s less money than they might have expected.
The surviving owner seems to have a windfall. This scenario is ripe for discord between the parties and may cause some financial hardship for the family.
$500,000
$125,000
UNFAIR

20. $500,000 $125,000 Revalued? PROFITS YOUR FAMILY PRODUCTS AND SERVICES
Income
Benefits
BUSINESS COSTS
Business Value
What if the parties can move forward amicably? Maybe they’ll agree to revalue the business.
If so, then the surviving owner must now scramble to get funding or pay for the buy out through an installment plan. This essentially becomes an unfunded or underfunded buy sell with all the associated challenges and costs.
A key person has just died, your costs have just gone up, services may suffer and profits may be down,. It’s at this moment where you may have agreed to add a significant new debt for you and your business. The business could be put into a fatal financial spiral and the family is now in the position of an unsecured lender.
These are the risks that are in place in your arrangement right now. And maybe, that’s the best plan for you – but maybe not. What we do is take a look at the decisions you’ve made, stress test them and see if they are the most appropriate tactic for you. Of course, it’s important to remember that in the course of this analysis I’m not providing legal or tax advice and that as strategies or recommendations may evolve, consulting with your lawyer and/or accountant will be vital to this process.
<If you are interested in exploring the issues inherent in an unfunded buy sell – be sure to review the issues covered in the Advanced Concepts on a Yellow Pad – Unfunded Buy Sells>
If there is no revaluation clause, it’s possible that the surviving family will try to find a way to get a higher pay out. Sometimes, the surviving owner is ok with increasing the price – but sometimes they want to stick to the bargain. That may be because the cost of a revalued buy sell may be too much for the business to handle. Now the negotiating starts and sometimes the lawsuits follow. As I mentioned, the buy sell is a legally binding agreement and overcoming that agreement in court may be tough. This is exactly what a buy sell agreement is supposed to avoid.
$500,000
$125,000
Revalued?
OWNERS / KEY PEOPLE $1,000,000

21. AN UNDER VALUED BUY SELL…
DOES THIS CONCERN YOU?
NEXT STEPS