DHill Financial

Trusted Insurance Adviser since 1990

Category: Golden Handcuffs

3 Steps to Turn a Great Year into a Succession Plan

Succession Planning with Cash and Life Insurance

Companies that quickly adapt to a changing landscape are continuing to see growth. The current business environment, where technical expertise continues to be an asset, requires the marriage of technology and the strategic use of capital to sustain long term growth success.

Advisers for many business owners continue to stress that the best time to sell a business is when business is good.  After a good year, our tendency is to pay out the success to ourselves and our key people which is well deserved, but if the goal is to build a business to sell we need a strategy to build wealth within the business.

Here are three -steps to consider if you want to leverage a good year into the succession plan you are really dreaming about:

  1. Pay a Bonus – As the founder of Mustang Sally’s Brewing Sean Hunt once told me, “cash is king”. Sean was a corporate attorney in mergers and acquisitions before opening the brewery in Chantilly, VA, and he saw how important it was to take care of key people. Deferred benefits (e.g., defined benefits plans, options, restricted stock) are terrific long-term incentives for key employees.  When a company’s financial performance justifies and enables it and a thoughtful bonus structure is established, though, few things are more effective at demonstrating to key employees that the company values their continued contributions to its success than cash.
  2. Build Reserves – Business Attorney Gosia Bochenek of Cochran Allan wrote in her December 2018 newsletter about the elimination of the Alternative Minimum Tax on Corporate Owned Life Insurance and how life insurance is the preferred model to fund a buy-sell agreement to assure business continuity by providing remaining owners with cash to purchase a deceased owner’s interest.  Buyout upon death  can be funded with both term life insurance and cash value life insurance, but cash value life insurance can also be part of a buy-out at retirement.  While term life insurance can fund the buy-sell (or key man for sole owner), cash value life insurance allows the company to build cash reserves which can be used to fund part of the buy-out for the owner(s).  Life Insurance cash value looks great as an asset on the balance sheet, you have created momentum towards a business succession, and if something happens before you can sell the company, you know your beneficiaries will be taken care with funding for your buy-sell agreement.
  3. Golden-Handcuff Key People – cash once given doesn’t have the same impact in keeping people on board as cash promised. While phantom stock and synthetic stock may play a role in tying key people to the goals of the company, Dan Doran of Quantive valuation shared that most often the way to get cashed out of these vehicles is by selling the company (and understanding your company valuation).  Term Life Insurance is often used to cover the loss of income or expenses that can result when a key person in the business dies.

Using cash value life insurance would allow a company to build cash to retain the key person.  A common approach in which control is required, the company purchases the policy and owns it for 5 years while the life insurance policy builds cash, they assign the allowable death benefit to the key person during that time, then bonus the policy to the key person after 5 years, and if the key person remains for a few more years, the policy is paid in full for life.

If the desire is to provide cash to assist the company or a key-person in funding the succession plan, now you can see a path to allow that to happen.  It all starts with a valuation to understand what you need, and from there you can better understand where cash, stock, and cash value life insurance can work together to allow your dream to become reality.

David Hillelsohn founded DHill Financial, LLC works with businesses and individuals to prioritize meeting responsibilities and using that as their foundation from which to build.  David is an independent insurance broker licensed in the majority states around the country, and he can be reached at 703.435.6028 or by email at david@dhillfinancial.com.  This article is not meant to be tax advice, please consult a tax professional for details.

Why your top Sales Executives deserve a raise

DHill Financial, Sales Executive, Insurance, Key Man, Trust, Split DollarLike any business that continues to succeed and flourish, it starts with a great idea, but that great idea goes nowhere without the ability to sell the idea to others.

Businesses recognize the key role their top sales professionals play in the overall success of the company, and elite sales professionals are often among the highest compensated employees at a company.

But is that enough, and even more important, how can you protect those assets?

Here are three questions to ask yourself to determine if changes are in order:

1. What is the Sales Executives worth to the company?

Taking the emotion out of the answer; if you were to transfer the risk of losing the sales professional to an insurance company, how much insurance would the company be willing to offer?

Do you know how much protection a company would be willing to provide in the event of a disability which took a sales executive out of production or an unexpected death?  Having properly assessed the economic value to the business will allow an organization to continue to succeed and flourish even during unpredictable events.

Key-Man protection can replace these economic losses to the business.  Insurance companies will typically offer up to 10 times salary for Key-Man protection. Take the sales professional who brings in $20 million of business to a company and is earning $300,000 a year; the employer may be limited to a key man policy that replaces $3 million (or 15%) of that revenue should something happen to the sales professional.

2. Does the Sales Executive feel valued and appreciated?

Many top sales professionals have lucrative sales incentive plans to help drive the type of sales behavior desired by upper management. Many of the same traits which make sales people successful in business also make them tougher to manage as employees; focus, drive, ego all play some role.

Employees like to feel valued, and especially those employees who use ego effectively to help reinforce the drive to succeed.  What message does it send to your top sales professional when you identify they are an important enough asset of the company to warrant additional attention… and protection?

Adding key man protection on the life of the Sales Executive in the event of a disability or a death sends a message that they are a key part of the success of the organization.  While firms work to avoid over-dependence, they also run the risk of not demonstrating how much the Sales Executive means to the company.

BEWARE, if you decide to buy Key Man on your top people, but not for your top people, that also sends a message.

3. Does the incentive package entice the Sales Executive to stay with the firm?

With fluctuating income, Sales Executives often find it hard to budget, plan, and execute sound financial plans. Employers can protect the value of their business, show the Sales Executive they are valued, and create an incentive plan to keep them happy through a split-dollar life insurance arrangement.

An employer can purchase a cash value life insurance policy for the sales executive where the employer retains some interest for Key Man purposes, helps the Sales Executive to defer some of their income, and provides them an incentive to stay with the firm.  Plans can be tailored around reaching Key Performance Indicators with a goal to have the Sales Executive reach a milestone to own the policy outright.

Contributions made by the employer to the plan on behalf of the Sales Executive are typically tax deductible making this an attractive tool to use as part of an overall compensation package.  This approach aligns the interest of the employer and the sales executive, creates an environment for long-term growth, and paves a strong path towards financial success.

 

David Hillelsohn, President DHill Financial, LLC an independent insurance professional.  David can be reached at 571.215.0361 with questions.  This is not meant to be tax advice, please consult a tax professional.

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