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The foundation of many sound business planning techniques and strategies that insurance professionals typically recommend generally starts with two components.

The first is an accurate estimate of the value of a client’s business, and the second is a review of their business continuation plan, to the extent one exists.

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 Smart insurance business practices are incorporating buy-sell reviews and business valuations into their practices as a way to keep them one step ahead of the pack and get deeper penetration in the business planning space.

Why a Formal Buy Sell Review Program Is Important

Having a well drafted buy-sell agreement is critical, but how does a client know whether what they have is any good? Many closely held business owners turn to their trusted legal advisors to help them execute buy-sell agreements, and then they put those agreements “on the shelf” where they can languish for years. Oftentimes, those agreements call for the value of the business to be reviewed annually, but that frequently never happens when the agreement is on the shelf collecting dust.

Statistics from the Small Business Administration indicate that 40 million business owners expect to sell their business in the next 10 years. By failing to review their buy-sell agreement, they can be doing themselves, their families and the co-owners a huge disservice. If the buy-sell agreement doesn’t contain the right triggers and valuation method, they can be short-changing themselves and their loved ones, particularly if the business is undervalued.

One way to grow your business is to seek out and work with law firms who have established formal buy-sell review programs, which can be a win-win for everyone. The Guardian Life Insurance Company of America recently established a buy-sell review program in conjunction with a national law firm. The program is free to producers.

This program has uncovered a number of common things that are often not addressed in buy-sell agreements:

  • The agreement does not provide for buyouts upon an owner’s disability, divorce, or retirement, bad boy and other triggers.
  • The agreement uses book value as the buyout price.
  • Specific payment provisions aren’t used, so it’s unclear how a buyout purchase will be paid for.
  • The agreement says nothing about insurance and what happens to policies upon lifetime exit.

In today’s challenging business insurance market, a buy-sell review program is a key differentiator that can set producers apart from the competition.

By providing producers with a customized and personalized report that provides an analysis of your client’s or prospect’s buy-sell agreement, specific recommendations can be reviewed with the business owner’s legal and tax advisors.

As there’s a full suite of materials to support the recommendations in the buy-sell agreement, including insurance illustration support, this can help keep producers one step ahead of the pack and get deeper penetration in the business planning space.

Everything Depends on Accurate Valuations

Many business owners struggle with a critical question: What’s their business worth? While many may have a rough idea of the value of their home, automobiles or what’s in their IRA or 401(k) plans, the value of their most important asset often eludes them. Unfortunately, there’s no publicly traded exchange where owners of closely held businesses can search for their business’ value.

When President Trump signed the Tax Cuts & Jobs Act of 2017 (TCJA) into law, many firms refocused their practices away from estate planning as a result of the higher estate tax exemption, and many smart firms have started to shift their focus to buy-sell planning as a way to replace the revenue lost from the de-emphasis on wealth transfer/estate planning market. What many insurance professionals are discovering is that helping a business owner know what the value of their business is can be the impetus that helps start the entire process.

While appropriately funding these agreements is essential, the proper level of funding is directly related to the value of the client’s business. Without an accurate estimate of a business’ value, neither the insurance professional nor their clients can have an informed conversation about whether their buy-sell agreement is adequately funded or whether they’ll receive fair value for their business interest upon death or disability.

How to Value a Business

There are many different ways a closely held business may be valued.

Depending upon the complexity and size of the business, a professional business valuation may be appropriate. That said, a professional business valuation can be costly, intrusive and time-consuming, which may be why only 2% of business owners opt for this approach. One of the most exciting developments in the space has been the “democratization” of business valuation planning.

Online tools such as those available from BizEquity allow CPAs, attorneys, trust officers and insurance professionals find and engage new clients, differentiate themselves in the competitive financial services industry and provide added value to customers. Insurance professionals can now quickly search and discover millions of “pre-valued” businesses which allows them to deliver and demonstrate value at their first client meeting and generate recurring firm revenue.

According to BizEquity, 75% of the world’s 200 million small businesses don’t know what they’re worth. Professional business valuations can be costly, intrusive and time consuming, which may be why only 2% of business owners opt for this approach according to BizEquity.

Working with business owner clients to get an accurate measure of what their business is worth can lead to a variety of planning opportunities and can help grow any insurance advisory firm’s revenues.

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James Magner, JD, CLU, ChFC, is a senior consultant with the business resource center at the Guardian Life Insurance Company of America.