1. Conversationally Competent – Succession Plans
Rick Katz
Director, Business Markets Development
AIG Advanced Markets
AIG
The most common obstacles to an agent’s success is rarely the technical aspects of the client development process. There are plenty of resources available to explain the legal, tax and other technical elements of a financial solution. Usually, an agent’s obstacle is about either not having enough qualified prospects or not knowing what to say to them once they agree to meet. While much of the Business Development Institute focuses on the prospecting and client development, it is at least essential that an agent have a working knowledge or a conversational competence to present major business concepts to business owners. This module, module 3.2, will focus on being conversationally competent regarding succession planning for business owners. After all, every business owner gets into business to create wealth, to sustain and grow a lifestyle and to eventually get out of business. Understanding the issues facing business owners as they plan ahead to exit their business will make you a more valued advisor as they go through the process. Through collaboration with other advisors, you can assist your client’s business and life unfold as they picture it. Hello; I am Rick Katz, the director of the AIG Business development Institute. Let’s get started with Conversational competence for succession planning.
Module 3.2
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2. Disclosure
Advanced Markets is a marketing unit of American General Life Insurance Company (AGL), a member of American International Group, Inc. (AIG). No representation or warranty, express or implied, is made by AGL or its affiliates as to the completeness of the information provided. All companies mentioned, their employees, financial professionals and other representatives are not authorized to give legal, tax or accounting advice. Applicable laws and regulations are subject to change and individuals should consult an attorney, tax advisor or accountant. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. Policies issued by American General Life Insurance Company (AGL) except in New York, where issued by The United States Life Insurance Company un the City of New York (US Life). Issuing companies AGL and US Life are responsible for financial obligations of insurance products and are a member of American International Group, Inc. (AIG). Guarantees are backed by the claims-paying ability of the issuing insurance company. Products may not be available in all states and product features may vary by state.
AGLC © AIG All rights reserved.
As a reminder, AIG does not provide any legal or tax advice. A client should seek their own advice from a tax and/or legal professional. You may be in an ideal position to coordinate the collaboration with your client and these other professionals.
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3. Opening
An investment in knowledge pays the best interest Benjamin Franklin
Real knowledge is to know the extent of one’s ignorance Confucius
Knowledge will give you power, but character, respect Bruce Lee
In many of Benjamin Franklin’s writings, he referenced the importance of self improvement and growing competence as well as confidence. He also said, “An investment in knowledge pays the best interest.” You must admit, that’s a pretty good Ben Franklin impersonation! On the other hand, Confucius said, “Real knowledge is to know the extent of one’s ignorance.” Knowing your limitations is crucial. Through the growth of knowledge, your limitations fall away. Finally, the martial artist, actor and creator of several TV shows, Bruce Lee, said, “Knowledge gives you power, but character, respect.” I’m a regular Frank Caliendo! But, seriously, this conversational competence is just a tool to be able to serve your business owner in a meaningful way that is in his or her best interest. Let’s explore how we assist this business owner to achieve more.
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4. 4 Steps to Developing an Exit Strategy
Used in coordination with Tax & Legal Professionals
Determine Parties - To whom will transition of ownership pass and who will be remunerated. The Buyer(s) and Seller(s).
Identify Triggers - The events or circumstances that will cause the transition of ownership to initiate.
Select Design - the shares of the departing owner will be purchased by an existing owner (cross purchase) or the company (entity/redemption).
Arrange Payments - This is the source of the funds and the specific terms of the transaction and payments to/from sellers and buyers
Here is how you can assist a business owner in planning a successful, dynamic exit strategy. Here is a 4 step process to developing an Exit Strategy. It is essential to collaborate with legal and tax professionals. Have I mentioned that? Embrace the opportunity to work with these other important advisers.
Here are the 4 steps: Step 1, Determine Parties - To whom will transition of ownership pass and who will be remunerated. Who are the Buyers and Sellers? Step 2, identify Triggers – These are the events or circumstances that will cause the transition of ownership to take place. Step 3, Select Design - the shares of the departing owner will be purchased by an existing owner (cross purchase) or the company (entity or redemption) most commonly. Finally, step 4, arrange payments - This is the source of the funds and the specific terms of the transaction and payments to and from sellers and buyers. Now, lets take a closer look at each step, beginning with Determining the parties.
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5. Parties - Triggers - Design - Payments
To whom will transition of ownership pass and who gets paid?
Identify the Sellers of ownership shares
Existing owner
Survivor(s) of existing owner
Identify the Buyers – to whom ownership with transfer
Other existing owners
Prospective owners
Entity or company
Who are the players? Who will be directly involved with the transition of ownership when the owner passes the baton? In other words, to whom will transition of ownership pass and who gets paid? We must identify the seller first – that’s the one that presently holds the ownership shares or will be inheriting ownership. This would be the existing owner and his or her survivors. Next, we must identify the buyers – to whom the ownership is expected to transfer. This may be other existing owners, prospective owners or perhaps the surviving company itself.
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6. Parties - Triggers - Design - Payments
Traditional Triggers
Death
Disability
Now that we have decided who the parties to the transition will be, we have to determine under what circumstances will the transition be initiated. In other words, what are the triggers or events that will happen that will wake up the agreement and cause it to go into action? Traditionally, succession plans are often referred to as Buy-Sell agreements. When an owner dies, his or her survivors often become heirs of his shares and the buy-sell agreement allows and compels someone else to buy the departing owner’s ownership interest – the shares, for a pre-determined price. Death of the owner is the most common trigger to initiate the transition of ownership. Sometimes, business owners will also consider disability of a business owner a trigger to cause the transition of ownership too. It is important that the definition of disability be included in the agreement so all parties are on the same page. Also, it would be quite helpful financially if there was external funding in place prior to either of these traditional triggers actually happening. This may take the form of life insurance or disability buyout insurance or other funding vehicles. More on that when we discuss payments.
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7. Parties - Triggers - Design - Payments
Traditional Triggers
Death
Disability
Optionality Triggers
Termination of Employment
Retirement of Owner
Divorce of Owner
Bankruptcy
Unfortunately, in real life, there are several other events that may occur that would cause the owner or an owner to transition ownership to other owners or someone else. Therefore, it may be wise for a business owner to consider these optionality triggers in addition to the traditional triggers. While the terms and document will be drawn up by a legal professional, you can assist your business owner client by discussing the importance of considering these additional triggers. First, termination of employment. What if one of the owners lost their professional license to practice whatever their trade was? A dentist, pest control, heating and air conditioning… Any occupation that requires a license. What about nefarious activities? They may want tom initiate the transition of ownership if one of the owners had their employment terminated. Another trigger could be retirement. In the absence of having the trigger in the agreement, they might have to wing it when the time comes for one of the owners to retire. Planning ahead typically will yield better results. A newer trigger is in the event of a divorce of one of the owners. Would the remaining owners want the ownership shares of the divorcee to become a negotiated item in the divorce settlement? Finally, Bankruptcy. All the best plans and then, life happens. Perhaps, if the effects of a potential bankruptcy are contemplated in advance, then different decisions may be made when selecting funding vehicles, ownership and the like. All things being equal, they might not be equal.
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8. Parties - Triggers - Design - Payments
Generally, there are 3 distinct designs:
Cross Purchase –
Each owner buys part of interest
Basis stepped-up to purchase price (if trigger is death)
One Way –
A non-owner individual agrees to buy business
Basis equals purchase price
Entity / Stock Redemption –
The business itself buys the interest
No basis step-up with redemption
We have discussed the parties to the succession plan and the triggers to wake up the agreement. Now, we will explore the 3 most common designs of an agreement. First, there is a Cross Purchase arrangement. In this model, when there are 2 or more owners, each owner agrees to buy the proportionate interest from the departing owner or departed owner’s heirs. The cost basis is stepped up to the purchase price if the transition of ownership occurred as a result of the death of an owner. This is a common design when there are fewer than about 5 owners. The next design is a One Way agreement. This is commonly used when there is only one owner. The transition of ownership only goes one way... From the old owner to the new owner. A non-owner agrees to buy the business from an owner. The new owner’s cost basis for the sale is equal to the purchase price. If the sale was initiated by the death of the existing owner, the existing owner’s heirs receive a step up in cost basis to equal the sale price too. Finally, there is an Entity Purchase, or, Stock Redemption agreement. Unlike the first two designs, this design does not have other people purchasing the departing owner’s shares of ownership. Rather, the entity itself – the company – buys the shares. There is not step up in basis for the entity when it buys the shares.
For Financial Professional Use Only. Not For Public Distribution.

9. Parties - Triggers - Design - Payments
Generally, there are 3 distinct designs:
Cross Purchase –
Each owner buys part of interest
Basis stepped-up to purchase price (if trigger is death)
One Way –
A non-owner individual agrees to buy business
Basis equals purchase price
Entity / Stock Redemption –
The business itself buys the interest
No basis step-up with redemption
While there are many reasons for using the Stock Redemption design, two circumstances seem to be the most common. First, it may be used when there are a larger number of owners. For example, if there were 6 owners, a cross purchase arrangement would require each of the 6 owners to agree to purchased shares from the other 5 owners. If funded with life insurance, this would require 30 policies – 6 times 5. The Entity design would only require 6 policies. The second common reason is if there is a great disparity in the cost of insurance between more than one owner. For example, if one owner was 56 years old and the other was 26 years old. Or, if one had a heart condition and the other was very healthy. By having the entity – or company, be responsible for buying back the shares from either owner, the disparity in the cost of funding is not quite as personal. The premiums are paid by the company for both policies instead of the lower risk owner paying for the higher risk owner and vice versa.
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10. Parties - Triggers - Design - Payments
Establish Price
Specific Dollar Amount
Independent Appraisal
Formula Calculation
Payment Provisions
Owner Financing
Substantial down payment
Installment payments
Bank Financing
Life Insurance
Combination of above
We have identified the parties, established the triggers and chosen the design of the agreement. Now, the terms of the agreement are decided. Most importantly, the payments from the purchaser to the seller. First, the parties have to establish a price or a way of determining a price. It can be a specific price that does not change or the parties can have an appraisal done at the time of the transition to determine the price. Or, a formula to determine the valuation can be incorporated in the agreement so the value will be dynamic and sensitive to ups and downs in the value of the business over time. Sometimes, an agreement may use a formula, which is validated at the time of the sale with an appraisal to be sure it is within a reasonable scope. NOW, the payment provisions. How will the departing owner receive this remuneration? While there are a number of options available, we will consider three methods, as well as a combination of these three methods. First, Owner financing. Perhaps they will pay a substantial down payment and then installment payments over time – typically from the cash flow of the business. The second method is financing the transaction. However, if this arrangement is not planned in advance, this may prove to be challenging since the business seeking the financing just lost a very key person, the departing owner. The third method is to purchase life insurance. If a permanent form of life insurance is used, it could also provide funds – through policy loans – for triggers other than death of the owner. Finally, a business may choose to use a combination of two or more of these methods to fund the transition of ownership.
For Financial Professional Use Only. Not For Public Distribution.

11. 4 Steps to Developing an Exit Strategy
Used in coordination with Tax & Legal Professionals
Parties - To whom will transition of ownership pass and who will be remunerated. The Buyer(s) and Seller(s). Creates a market for owner’s shares and identifies the buyer
Triggers - The events or circumstances that will cause the transition of ownership to initiate. Allows for a smoother transition of ownership, following anticipated events
Design - the shares of the departing owner will be purchased by an existing owner, the company or agreeable non-owner. Right design can simplify the transaction and funding
Payments - The source of the funds and the specific terms of the transaction and payments to/from sellers and buyers. Specifies the price and terms of payments in advance.
In summary, there are 4 steps to developing an exit strategy. Of course, these efforts should be done in collaboration with tax and legal professionals. Step 1 is identifying parties. To whom will transition of ownership pass and who will be remunerated? Who are the Buyers and Sellers? The benefit is that it creates a market for owner’s shares and identifies the buyer.
Step 2, Triggers – What are the events or circumstances that will cause the transition of ownership to initiate? The benefit is that it allows for a smoother transition of ownership, following anticipated events.
Step 3 is determine the design – Who will buy the departing owner’s shares? An existing owner, the company or agreeable non-owner? The benefits is that the right design can simplify the transaction and funding, while considering tax advantages if available.
Finally, step 4, Payments – This determines the source of the funds and the specific terms of the transaction and payments to/from sellers and buyers. The benefits is that it specifies the price and terms of payments in advance.
For Financial Professional Use Only. Not For Public Distribution.

12. Next Steps
Most small businesses with a written plan have a cross purchase design. Most small businesses do not have a written plan1
Select 10 business owners for a simple survey:
“Do you have a written exit plan for your business?”
If YES: o Cross Purchase o Entity o One Way
If NO: Would you like to learn how to put a plan together?
Next module: Conversationally Competent – Key Person
This information should provide you with the competence to have a discussion with a business owner and assist them through the collaborative process of creating and executing a succession plan. Reinforce this competence through practice and repetition. This is an effective discussion to have with a business owner to engage them in planning ahead without buying or selling anything. Perhaps a survey of business owners would make you aware of how many businesses have conducted this planning – or not. Just ask two questions of a business owner: Question number 1, do you have a written exit plan for your business? If they say yes, question 2 is, “Do you know if it is a Cross purchase, Entity or One way agreement? If they don’t have a plan, ask, “Would you like to learn how to put a plan together?” Move on to the next one.
The next module is called Conversationally Competent – Key Person. While you don’t have to be the expert, you have to know enough to have a meaningful discussion.
1BEI 2016, Business Owner Survey Report
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13. Questions or Comments? AIG Advanced Sales Business Development Institute BDI@aig.com 855-323-6923
If you have any comments, questions or feedback about this module or anything else regarding the AIG Business Development Institute, please contact us by at Or, you can call our AIG Advanced Sales team at This is Rick Katz for AIG’s Business Development Institute. Remember, the more small business owners you help, the more successful you will be.
For Financial Professional Use Only. Not For Public Distribution.