Business Continuation Planning

 Is the business readily marketable?  Can the assets be easily converted to cash for the benefit of your family?  Is there a logical successor who can take over the business?  partner  other shareholders  key person  family member What will happen to your business at your death?

 The business can be sold to an outsider, or  The remaining owner(s) can continue in business with the deceased’s spouse, or family, or  The deceased’s interest can be sold to the remaining owner(s), or other interested party, or  The business can be liquidated. When a business owner dies…

 The most logical solution is to keep the business going by allowing the remaining owner(s) or other interested parties to purchase the deceased’s business interest from the family under favourable conditions. In most cases

Buy/Sell Agreement How is this done?

 A legal agreement which provides for the transfer of a business interest in the event of: death disability retirement desire to leave business Buy Sell Agreement What is it?

 Business owners, either shareholders or partners  Business owner and key employee(s)  Business owner and child/children Buy Sell Agreement Who is it between?

For the deceased’s family …  They have a guaranteed market for the business interest  They are guaranteed a fair price  They are not forced to become involved in the business or be dependent upon remaining owner(s)  It facilitates the settlement of the deceased’s estate What are the benefits?

 The business keeps running  They continue as sole owner(s) without involvement from deceased’s family  It provides a smooth transfer of the business interest  The sale price, or the method to determine it, is fixed in the agreement For the remaining owner(s)... What are the benefits?

 There are NO SURPRISES!  The agreement is entered into when all parties are alive and have input into details of the business continuation plan. For all parties... What are the benefits?

The agreement establishes the terms of transfer of the business interesthowever where does the money come from to complete the transaction? Where does the money come from?

 Sell personal assets  Borrow funds  Pay over time  Life insurance Let’s examine each of these sources... Sources of money at death

 Potential loss of value if forced sale  Possible loss of income producing assets  Potential tax consequences  Insufficient funds provided Sell Personal Assets – except there might be …

 Can a lender be found?  Interest payments will add to cost.  Can business generate sufficient funds to repay loan? Borrow funds, however…

 Deceased’s family is dependent on ongoing success of business  It could negatively affect the cash flow of the business  The remaining owners must pay both principal and interest Which leads to... Pay over time, but …

 It provides immediate cash when required  It’s economical - the annual cost is a fraction of the benefit ultimately paid  The insurance proceeds are tax-free  The business continues unencumbered Life Insurance "The Economical Method"

What does the agreement cover? Key Buy Sell provisions

Conditions for a forced sale  Provides for transfer at death, permanent disability, retirement, violation of shareholders agreement. Right to sell provisions  Existing owner(s) must be offered chance to buy shares before sale to third party. Valuation and Price  A formula for valuing the shares should be included in the agreement. What do these mean?

Insurance  corporate or personally owned insurance  amount of insurance coverage  type of insurance policy Payment provisions  Include details of how the remaining owner(s) will pay for the business interest  terms of payments, interest and security on loan if insurance proceeds are insufficient for complete funding What do these mean?

 Personally owned  Criss cross  Corporate owned  Promissory note  Share redemption Insurance Funding Methods

Personally Owned Criss Cross

A dies B A’s family Insurance proceeds A’s shares B owns 100% of co. Personally Owned Criss Cross

Advantages  easy to understand  corporate creditors have no access to insurance proceeds  insurance proceeds received tax-free Disadvantages  may be inequitable insurance costs due to age, health and percentage of ownership  insurance premiums paid with after tax personal dollars Criss Cross

Company owns life insurance on A and B. Company is owner, premium payer and beneficiary. Corporate Owned

A dies B A’s family Promissory note shares B owns 100% of co. Corporate Owned Promissory Note Method

Insurance proceeds Company Capital Dividend Account Tax free capital dividends B Repays note A’s family Corporate Owned Promissory Note Method

Advantages  premiums paid with corporate dollars  impact of premium differentials reduced Disadvantages  more complex than criss cross  life insurance proceeds are not protected against corporate creditors at death Promissory Note

A dies Insurance proceeds Company A’s family $ from CDA A’s shares B now owns 100% of co. Corporate Owned Share Redemption Method

Advantages  premiums paid with corporate dollars  impact of premium differentials reduced Disadvantages  complex arrangement  life insurance proceeds are not protected against corporate creditors at death Share Redemption

Considerations:  Tax bracket of company and individual  Is capital gains exemption available?  Degree of complexity involved  Terms of the buy/sell agreement  Number and ages of parties to agreement and percentage of ownership Which method is best?

 What capital gains implications arise on transfer of business interest?  Do shares qualify for $500,000 capital gains exemption?  Does agreement allow for payment of tax free $10,000 death benefit?  Are wills co-ordinated with agreement? Income Tax Issues

 This presentation is a general overview of business continuation arrangements.  Consult your legal and accounting advisors for detailed information.  Regular review of agreement and funding is recommended. But, Please Remember …