Opportunities Abound In Business Continuation Planning
The key to success in business continuation planning–just like the key to success in other advanced market areas–is knowing your client.
Knowing your client, the business owner, has been made somewhat easier as a result of a study conducted by LIMRA in 2001. The survey, which encompassed small business owners (defined as businesses with fewer than 100 employees), tells us that of the approximate 6.4 million small businesses in the U.S., 55% are family-owned.
Compared with the rest of the U.S. population, small business owners, on average, are older. For example, 39% of small business owners are in the 50-64 age group, compared with 21% of the U.S. population in the same group.
In addition, small business owners are more highly educated. Approximately 51% of small business owners have a college degree or post-graduate work, compared with 22% of the population at large. The LIMRA study also revealed that nearly 28% of spouses are employed in the family business.
Perhaps the most telling finding of the study is that only one-half to two-thirds of small business owners have a business continuation arrangement in place, and that businesses with fewer employees are less likely to have a formal plan to transfer the business interest.
What does this mean for a producer? Its evident that there remains a fairly robust market for business continuation planning. One of the keys to tapping that market is learning the goals and objectives of the business owner.
What are his hopes for his family business? Does he want to leave the business to a child? Does he want to retire or sell the business?
In consulting with producers over the years, I have found that planning for business continuation requires all the technical and psychological skills a producer can bring to the table. Planning for business continuation is as sensitive in as many ways as planning difficult estate distribution schemes. Why? Because youre planning for what will happen to their baby–their business.
It is not enough to understand the ins and outs of cross-purchase arrangements, stock redemption arrangements, Employee Stock Ownership Plan buy-sells and buy-sells in Irrevocable Life Insurance Trusts. It is crucial to understand the clients goal, and help him synthesize the information needed to understand and to come to a decision around the business continuation plan.
For example, I recently consulted with a producer who was having trouble in determining executive compensation recommendations for a 63-year-old owner of a successful small business. The business owner is hopeful that his 13-year-old son will take over the business some day. His business has two key employees, who happen to be husband and wife, both in their late 30s. Because they are essential to the business success over the next 10 to 15 years, the owner is interested in providing an incentive for them to stay.
My conversation with the producer, then, centered on the types of “key employee” benefits the business owner could extend to his key employees.
The simplest executive compensation benefit would be an executive bonus arrangement, moving to a restrictive endorsement bonus arrangement in which “handcuffs” are desired. “Handcuffs” typically imply that the benefit is not payable until a later date, so that the employee is committed to the business if he wants to receive the incentive award.
We also discussed varieties of deferred compensation arrangements ranging from employee-only deferral to a Supplemental Executive Retirement Plan.
The producer was concerned that none of these arrangements might be sufficient to entice the key employees to stay for 10 to 15 years. He was also concerned that the key employees would leave and start their own business.
While all of the aforementioned “tried and true” executive compensation arrangements are valuable, we discussed the opportunity to add a layer of additional benefits that might entice the key employees to stay.
Our business owner is 63 and has a 13-year old son he hopes will take over the business. His spouse also is totally dependent on him for support.
One twist on executive compensation is to offer a one-way buy-sell arrangement to the key employees for a term of years. The buy-sell arrangement would be for the key employees to purchase the business, funded with life insurance, for a specified term of years. Given the sons age, this term of years might range anywhere from 10 to 20 years.
This plan offers an additional benefit to the business owner: it secures a lump sum of cash to his surviving spouse, which she can use to support herself and her son. It also gives the business owner a framework to discuss business succession with both his young son and his key employees.
For the key employees, this plan offers the possibility of taking over the business. It also opens the door to further negotiations if the son does not wish to take over the business, while having a clear termination date if the business owner survives the term of years and the son does want to take over.
This case presented itself as an executive compensation case, yet the solution was to offer the key employees two executive benefits: a restrictive bonus plan and a buy-sell plan for a term of years. More importantly, this solution may not have presented itself without first gaining knowledge of the client and his goals.
, J.D., CLU, ChFC, is vice president – business planning at Jefferson-Pilot Financial, Greensboro, N.C. You can e-mail Lisa at firstname.lastname@example.org
Reproduced from National Underwriter Life & Health/Financial Services Edition, February 11, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.