Title: Steer Clear of the 'Logan Roy' Syndrome in Buy-Sell Agreements by Focusing on Crucial Elements
Lina Storm serves as EVP and Head of Advanced Insurance Solutions at NFG, part of Cetera Financial Group. Succession planning isn't just a Logan Roy issue; many thriving businesses, like his fictional empire, lack a clear plan to pass the reins to the next generation.
According to a PwC survey, an unsettling 66% of family businesses fail to have a documented and communicated succession plan in place. This lack of planning can result in hefty consequences, like in the Connelly v. United States case, where a poorly constructed plan and misaligned insurance policies led to excessive estate taxes.
Business owners should vocalize their intentions and collaborate with their team of advisors, including their CPAs, estate planning attorneys, and insurance advisors, to prevent such consequences. Three primary components of a successful buy-sell plan include:
- Buy-Sell Agreement
- A buy-sell agreement should specify the circumstances under which shares will be transferred and purchased, the amount paid, and the designated funds for payment. The agreement should also address disputes and clearly outline the pricing & valuation methodology.
- Business Valuation & Price
- A formal evaluation takes place every few years, but even an informal assessment can suffice. Factors like business structure, economy, trends, earnings potential, and industry popularity contribute to valuation. Regular reviews and alignment with funding are essential.
- Buy-Sell Agreement Funding
- Insurance policies, such as life, disability, and long-term care, can provide timely funds for business buyouts. Properly aligned definitions and terms are vital to avoid scrutiny from the IRS.
In my experience, pricing and valuation are typically the most contentious aspects of buy-sell transactions. Clear communication and stipulations in the agreement can help avoid potential litigation.
Engaging with experienced advisors can help business owners avoid common pitfalls and ensure a seamless transition to the next generation. Topics like communication, pressure, preparation, objective evaluation, strategy, and tax & legal implications are crucial when consulting with professionals.
Lina Storm, being the EVP and Head of Advanced Insurance Solutions at NFG, could provide valuable insights during the process of funding a buy-sell agreement with insurance policies. In the hypothetical scenario where Lina Storm's family business lacked a clear succession plan, her expertise in this field could help prevent unwanted consequences and excess estate taxes.
