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 AgreementWhat is it?

Business owners, either shareholders or partners

Business owner and key employee(s) Business owner and child/children

Buy Sell AgreementWho 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 interest

however

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"

Payment Provisions

Insurance

Valuation and Price

Right to sell

Conditions for forced

sale

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

B o w nsin su ra nce o n A

A o w n s 5 0%

A o w nsin su ra nce o n B

B o w n s 5 0%

C o m p a ny

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 understandcorporate creditors

have no access to insurance proceeds

insurance proceeds received tax-free

Disadvantagesmay be inequitable

insurance costs due to age, health and percentage of ownership

insurance premiums paid with after tax personal dollars

Criss Cross

A o w n s 5 0% B o w n s 5 0%

C o m p a ny

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

BRepays noteA’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 diesInsurance 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 arrangementlife 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 …