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Succession Planning Manulife and the block design are registered service marks and trademarks of The Manufacturers Life Insurance Company and are used.

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Presentation on theme: "Succession Planning Manulife and the block design are registered service marks and trademarks of The Manufacturers Life Insurance Company and are used."— Presentation transcript:

1 Succession Planning Manulife and the block design are registered service marks and trademarks of The Manufacturers Life Insurance Company and are used by it and its affiliates including Manulife Financial Corporation. 2004. The Manufacturers Life Insurance Company of New York. All rights reserved. MNY0323043359. Expires 3/2005 The Manufacturers Life Insurance Company of New York 100 Summit Lake Drive, Valhalla, New York, 10595 A way to protect and preserve the business for future generations

2 Question 1 How do you make sure every kid receives their fair share? 2

3 Question 2 How do you prevent the loss of sweat equity in the family business? 3

4 Question 3 How do you ensure a fair price for the family business? 4

5 Question 4 How do you protect your business from the loss of a key employee? 5

6 The answer to all of these questions is Succession Planning 6

7 Small Businesses can fail without proper succession planning 7

8 8 What is Succession Planning? A plan put in place to ensure the survival of the business if something happens to one of its owners or key employees. Can be either: –Key Person Insurance –Buy-Sell Arrangements

9 9 Prospects for Succession Planning 82% of small business owners are over the age of 40. 39% of all small businesses will see a change in leadership in the next 5 years. 10-15% increase in the number of small businesses expected over the next 5 years.

10 10 Succession Plans in Place 4 out of 6 businesses own life insurance for business purposes such as key person. 60% of firms with succession plans fund them with life insurance. Only 6 out of 10 businesses have formal succession plans in place.

11 11 Why Succession Planning? Without a properly funded succession plan in place turmoil and struggles for control can result in destruction of the business. Prevent sale of the business to outside owners. Make sure the business receives the fair market value. Ensure sufficient cash to pay estate taxes, bills and income needs.

12 12 Types of Succession Plans Buy-Sell Arrangements –Cross Purchase –Entity Purchase Key Person Insurance

13 13 Buy-Sell Arrangements A buy-sell arrangement is an agreement between business owners in which one party agrees to sell an interest in the business and the other agrees to buy it.

14 14 Buy-Sell Prospects All closely-held businesses Sole Proprietorships Partnerships S and C-Corporations

15 15 Why Buy-Sell Arrangements Guarantee a buyer Create Liquidity Set a Fair Selling Price Fix Value

16 16 Cross-Purchase Arrangements An arrangement in which each business owner(s) agrees to buy out the other(s) in case of retirement, disability, or sudden death.

17 17 Entity Purchase Arrangements Buy-sell arrangement between a business entity and its individual owners. The business agrees to buy the business interest of the owners upon death, disability, or retirement.

18 18 Key Person Insurance Insurance policy taken out on the life of a key employee or owner to protect the business in case of sudden death, disability or retirement. Key person could be an owner, partner, or employee whose knowledge and contributions to the company are invaluable.

19 Answer 1 King County Sports 19

20 20 History of King County Sports Brothers Jim and Wayne Quincannon opened a small canoe and wilderness shop in 1944. Today, King County Sports is the largest supplier of outdoor equipment in the Northwest. Jim has four kids who are active in the business. Wayne has two kids who are pursing other interests.

21 21 The Facts In 1953, King County Sports was incorporated. In 1972, Jim and Wayne set up an entity purchase buy-sell arrangement. In 1978, Jim retired and they updated the buy-sell arrangement to include the children.

22 22 The Problem Jims kids are active in the day-to-day operations. Waynes kids are not interested in the business. Jim and Wayne want to split the business equally between the six kids.

23 23 The Solution: Entity Purchase Buy-Sell Arrangement King County Sports will purchase life insurance policies on Jim and Wayne. When Wayne passes away, the life insurance proceeds will be used to buy his shares from his children. Jim and his family will continue to run the business.

24 24 Here is what it looks like Stock King County Sports Manulife New York Waynes Estate Jims Estate Death Benefit Premiums (lives of Jim and Wayne) Redemption Price

25 25 Summary By setting up an Entity Purchase Buy-Sell Arrangement, Jim and Wayne ensure the success of King County Sports for the next generations.

26 Answer 2 Cozy Corner Coffee Shop 26

27 27 History of Cozy Corner Cozy Corner coffee shop was established in 1985 by two college roommates, Abby Drew and Susan Bond. It started as a hangout for artists and college students and has grown into a mainstream business known for its great fat-free yogurt muffins and organic coffee.

28 28 The Facts College roommates and best friends, Abby and Susan, opened a coffee shop in 1985. They leased a storefront in an upcoming area of Boston and poured a lot of sweat equity and time into the business. In 2002, they are at the center of the action.

29 29 The Problem They are getting ready to expand the business. They have agreed that if anything happens to either one, they do not want to sell out to Corporate America or have a new partner. They will need funds to buy the other out.

30 30 The Solution: Cross Purchase Buy-Sell Arrangement Abby and Susan will purchase life insurance on each other. Each is the owner and beneficiary of the policy on the other. If something happens, they will have the proceeds to purchase the business interest of the other.

31 31 Here is what it looks like (assuming Abby dies first) Cozy Corner Coffee Shop Coffee Shop shares Manulife New York Insurance Policy Abbys Estate Susan Abby Death Benefit Coffee Shop Shares pass to Abbys estate Death Benefit proceeds

32 32 Summary By entering into a cross purchase buy-sell arrangement, Abby and Susan can be assured they will not have a new partner if something happens to the other.

33 Answer 3 Plants Galore 33

34 34 History of Plants Galore Patrick Reagan, Scott Pons, and AJ Santoro worked for a major landscaping company and in 1997 left to start Plants Galore. They purchased an old drive-in movie theater and converted it into a plant nursery and landscaping business. Recently, they were the featured landscapers on the HGTV Dream Home.

35 35 The Facts In the past 5 years business has been booming. More and more people are moving into the area and the demand for both landscaping and retail services has exploded.

36 36 The Problem Patrick, Scott, and AJ need to do some planning. They are reluctant to put together a succession plan, because they do not want to undervalue the business.

37 37 The Solution: Business Valuation using the Book Value and Capitalization Method To ensure the fair purchase price of the business, it is important to determine its value often as part of the buy-sell arrangement. Book Value (assets-liabilities=assets) and Capitalization Method (earning x capitalization factor). This solution gives more flexibility in deriving a fair purchase price. All parties must agree.

38 38 Summary By valuing the business regularly, Patrick, Scott and AJ can be assured they will not get shortchanged when and if they sell the business.

39 Answer 4 William West and Walker Industries 39

40 40 History of William West William West is age 45. He is the top sales person for Walker Industries. He is the adopted son of the founder, Tom Walker. He is not only the top sales person, but is friendly with everyone. It would take someone years to build up a client list like his.

41 41 The Facts William West is the Sales Leader. Tom Walker and Walker Industries would be lost without him. It will take at least two people, if not more, to replace him.

42 42 The Problem Walker Industries does not have enough liquid assets to train and hire two replacements for William.

43 43 The Solution: Key Person Insurance Walker Industries will buy a life insurance policy on the life of William West. William West will not have any interest in the policy. Walker Industries is the owner and beneficiary of the policy.

44 44 Here is what it looks like Walker Industries Walker Industries pays the premiums Upon Williams death, Walker Industries will receive the death benefit proceeds William West Manulife New York Life Insurance Policy

45 45 Summary By implementing key person insurance, Walker Industries will have the funds to hire and train replacements as well as weather the storm should something happen to William West.

46 46 Business Succession Planning Succession plans are put in place to ensure the survival of the business upon retirement, death or other changes in the business relationship. They are an essential part of any business and can help make the transition of ownership to the next generation easier.

47 Many small businesses in America fail as a result of improper planning 47

48 For more information on Succession Planning, please call your local Manulife New York Representative, or the Advanced Markets Group at (800) 743-5542, option 5 48

49 49

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