You’ve worked hard to build your business and may look forward to the day when you can retire. Many business owners use the sale of their businesses to help fund their retirement years. Have you considered how you will successfully exit the business you’ve worked hard to build?

Here are three questions to think about.

1. Do I have an exit strategy?

It’s not just selling your business for retirement. A good exit strategy should consider several scenarios including death, disability, or your intent to sell the business. Having the right strategy in place can mean the difference between a successful transition and a forced sale.

It may seem obvious, but there are several ways to exit a business, such as having fellow owners purchase your share, keeping it in the family, or securing a new buyer.

If you plan to sell your business during your lifetime, you likely want to transfer it for the greatest value. Getting a valuation of your business can help you achieve this.   

2. Is it in writing?

If your exit strategy isn’t in writing, you may have a potential problem. Handshakes or verbal agreements are generally hard to enforce in a court of law.

It’s important your exit strategy agreement and related documents are signed by all parties involved. It’s also a wise move even if you never plan to retire. If you die, there’s no guesswork for your family about your exact intentions for your business.

3. How is it funded?

After your exit strategy is in writing, you need to secure how you will be compensated for your share of the business.

For example, if your exit strategy is to sell your business at retirement, or in the event of your death or disability, consider how the buyout will be funded and whether your agreement contains a mechanism for valuing your business interest on an ongoing basis.

One ideal funding source of a buy-sell agreement is life insurance. Triggered at the death of an owner, it is often the most affordable funding mechanism when compared to alternatives such as a sinking fund, a bank loan, or an installment sale.

Start the conversation

A great place to start is by working with a financial professional to help you get definitive answers to these three questions about exiting your business.

If your family is a part of your exit strategy, be sure to include them to ensure your plan will be successfully received and implemented. And always consult with your tax and legal advisors prior to implementing any exit strategy.

Your employees help make your business a success. Some employees may be especially key to that success, bringing unique skills, expertise, talent and decision-making power.

Key person life insurance is a powerful way to protect your business from the potential loss of those key employees.

How key person life insurance works

With key person insurance, your business is typically the owner of the policy and pays the premiums. If you use permanent insurance, you have access to any cash values through loans¹ as business needs arise.

If the employee dies, an income tax-free death benefit is paid to your business, minus any loan amounts, to help you get through a difficult time after the loss of a key employee.²

Key person life insurance can help you:

• Protect with a death benefit: A life insurance death benefit can help your business transition after the death of a key employee.
• Access cash values: Use permanent life insurance to build cash value that you can access through policy loans when your business needs it.
• Add flexibility with riders: Certain available policy riders can add additional protection from events such as disability or employee retirement.

Your financial professional can help you explore key person insurance as a protection strategy for your business.

One of the best ways to keep highly valuable employees is to offer fringe benefits. One benefit that can be mutually beneficial to you as the business owner and your valued employees is a split-dollar plan.

How split-dollar works

Through a split-dollar plan, you enter into an agreement with your employee through which you share the rights and obligations of a life insurance policy.

As the business owner, you generally pay the policy premium and your employee, as the insured, has the benefit of life insurance protection at an affordable cost. The benefit continues as long as the split-dollar plan is in force (typically, as long as the employee works for you). If the employee leaves the company or passes away, you have certain rights in the policy, depending on the type of split-dollar plan chosen.

Split-dollar plans can help you:

• Offer a benefit with mutual protection: Your employee gets life insurance protection while your premiums may be returned on the benefit if the employee leaves the company or passes away.
• Be selective: Unlike a qualified retirement plan, you can be selective when you choose which employees get this benefit.
• Have flexibility in policy design: From how premiums are paid to who owns the policy, split-dollar plans can be designed to meet the needs of your business.

Your financial professional can help you explore split-dollar plans as a protection strategy for your business.

You know your business inside and out, but do you know all the ways you can use a life insurance policy to protect or grow your business?

Most think it’s a policy that pays a death benefit to your loved ones when you die. And they’re right. But life insurance can also be useful for business owners in ways you may not have considered.

Here are a few ways life insurance has proven to help business owners meet challenges and work toward building their business.

Protecting your business against loss

Many business owners know life insurance can protect families if a primary breadwinner dies, but it can also help protect your business if a key employee dies. You may have employees who help drive your organization or bring in crucial sales. What if suddenly they were gone?

Many employers use life insurance to protect their businesses from the loss of a key employee. Key person insurance is a policy that makes your business the beneficiary of a death benefit to provide needed income as you make a very difficult transition after losing an important employee.

Securing a loan

One way a business owner can use life insurance is to help secure a business loan. Certain banks and lenders may allow you to list life insurance as an asset when being considered for a loan. Other lenders may allow a collateral assignment, where a business owner with a life insurance policy collaterally assigns the policy to the bank/lender.

If you die, the bank receives their portion of the death benefit based on your loan collateral agreement, covering some, or potentially all, of your loan amount. This can reduce your risk as a borrower and play a role in securing a potentially lower loan interest rate.

Saving for a rainy day

Permanent life insurance policies build cash value within your policy as you pay premiums. This cash value can serve as a rainy-day fund in lean times for your business because you can take out loans¹ from the life insurance policy against that cash value.

There are less credit score worries for your business to qualify for a loan, because the life insurance company will use your cash value as collateral. The loan will likely have a significantly lower interest rate than what you can secure from a bank.

Sweetening the pot for your employees

Many business owners use life insurance as a fringe benefit to valuable employees. From executive bonus plans to split-dollar agreements, life insurance can be used to recruit, retain, and reward valuable employees who are crucial to the success of your business. And because it’s not a qualified benefit like a 401(k) plan, you can determine who is eligible without having to offer to all employees.²

Leverage to meet challenges ahead

Many business owners like you have been able to leverage the features and flexibility of life insurance to meet challenges head on and keep their businesses moving in the right direction. This isn’t a solution you should work out on your own though. Your financial professional can help you determine which life insurance policy could help you meet your specific needs, budget, and circumstances.

Every business owner faces the challenge of deciding how to best use available resources to grow their company. But positioning a business for growth takes more than just producing more of a good or service.

It’s also about finding the right balance when setting up plans to protect your business, to provide for your employees, and to take care of your own needs – because neglecting any one of those areas could jeopardize the ability of your business to succeed.

Protecting your business

Even thriving businesses may face adversity. Without the right safeguards in place, what should be temporary setbacks can quickly become serious threats to the health and sustainability of your business.

One of the most significant risks you can help protect your business against is the impact of losing a key employee due to death or disability. The impact on the business is heightened even more if the loss involves an owner. Many successful businesses put buy-sell policies in place to help ensure the business can continue operating when challenges come, helping protect the livelihood of the owners, employees, and their families.

Providing employee benefits and rewards

When structured properly, employee benefits become a powerful and cost-effective way to drive business results. Foundational benefits like a 401(k) plan are critical to attracting and retaining talent, while helping your employees prepare for the future. Targeted benefits for your top talent, like executive bonus plans and split-dollar life insurance, can improve retention and reward them for delivering exceptional business results.

Planning for your own needs

With so much time, energy and passion invested in your business, it can be easy to forget to take the time to plan for your own financial future. And while your business may be the best investment you ever make, it’s also true that not every business succeeds. An over-reliance on your business to provide for you and your family may be putting your future at too much risk. Other factors beyond your control, like a premature death, can also put your family and business at risk, even if your business is thriving.

Effective personal planning helps balance these risks so that you can focus on making your business successful, while knowing that the needs of you and your family will be taken care of. You can take important steps like having sufficient life insurance, helping protect your income with setting aside resources for your retirement, and planning ahead for the future sale or transfer of your business.

Balancing business and personal planning takes a bit of extra effort, but with a bit of guidance from a financial professional, it can help you maximize the value of your business for you, your family and your employees.

With an affordable pricing structure and the ability to convert to a high quality permanent policy, there’s a variety of ways AuguStar Life’s Term Plus policies can go to work for business owners.

Here are three.

Prepare for business continuation

A buy-sell agreement is a contract providing for the sale of a business ownership interest when a specified event occurs — generally, the death of one of the business owners. Term life insurance can be an ideal, budget-friendly funding vehicle in a buy-sell agreement.

If an owner dies, the death benefit proceeds can be used to help purchase the business interest per the buy-sell agreement.

Each owner might consider an affordable term policy with a face amount large enough to cover the agreed-upon purchase price (subject to insurability factors like age and health of the insured).

A fully funded buy-sell agreement can help:

• Predetermine the price at which the buyer agrees to purchase, and the owner agrees to sell, their interests in the business
• Create a market for each owner’s share of the business
• Provide money to fund the purchase at the exact time it is needed
• Establish the business’ value for federal estate-tax purposes

Protect against the loss of a key employee

Successful businesses are built on a variety of assets including equipment, inventory, real estate, accounts receivable, cash, goodwill, but most importantly, key people. The death of a key person could have a devastating effect on the future of your business.

A key person is anyone who significantly contributes to business success and whose death would result in a tangible loss to the business. Key person insurance helps to cover your business for the death of a key person and the loss of that individual’s skill and expertise.

To put key person protection in place, a term policy is purchased with a death benefit amount based on the employee’s value to the organization (most often, a multiple of salary). The business is both policy owner and beneficiary. Should the key person die, the death benefit proceeds are used to offset business losses such as sales, productivity, and credit.

Reward your key employees with a fringe benefit plan

To attract and keep innovative, quality people, you need to offer quality fringe benefits. Fringe benefits don’t have to be difficult or complicated. In fact, a simple plan can often be the best.

An executive bonus plan allows you to choose the participants in the plan and is typically simple to administer. The key employee owns the policy and selects a beneficiary, and your business pays the premium directly or indirectly through a salary bonus. The bonus amount is typically tax deductible by your business as an ordinary and necessary expense. The same bonus amount is taxable to the employee as ordinary income just like any other cash bonus. In addition, you always have the option to increase bonus payments to offset your employee’s income tax liability.

You can start the plan using an AuguStar Life Term Plus policy. In later years, the employee has the option to convert the term policy to permanent insurance.

We can help

We can help you use term insurance to protect your business. Contact your financial professional about business planning today.

Successful business owners know the key to successful business is their people. An executive bonus program funded with permanent life insurance can be a great way to help business owners recruit, retain, and reward key employees.

How does it work?

An executive bonus plan allows business owners to choose the participants in the plan and is typically simple to administer. Under the plan, the key employee owns life insurance on his or her life and selects a policy beneficiary. The business pays the premium (typically through a salary bonus) in accordance with a written agreement with the employee. The employee typically pays tax on the bonused premium amounts. 

Benefits of an executive bonus plan:

• Provides a quality fringe benefit for key employees
• Typically simple to administer
• Allows flexibility as to plan participants
• May provide the business with a current tax deduction
• Offers the employee death benefit protection and, when permanent life insurance is used, accumulated cash values

The employee enjoys the security of life insurance coverage while having access to the policy’s cash value in a standard executive bonus design. And when properly structured, cash bonused to pay the policy premiums is tax deductible to your business assuming IRS guidelines are met.

For many business owners, there is a lot of investment that goes into key executives. As an incentive to encourage the executive to stay long-term with your company, many business owners enhance executive benefits with a supplemental executive retirement plan (SERP).

A SERP lets the executive know they are a valuable part of your team while also encouraging them to stay with your company.

How does a SERP work?

You promise to pay the employee a retirement income stream or lump sum benefit if he or she stays with the company until retirement. You also may provide disability and/or death benefits under the plan.

A SERP is often called a “golden handcuff” plan. When structured as a forfeitable plan, the employee generally forfeits all business if he or she leaves your business early.

Funding a SERP

For many business owners, life insurance is the ideal informal funding mechanism for many SERP agreements.

As a business-owned policy, the company has total control over the policy and flexible, tax-advantaged¹ access to its cash value and income tax-free² death benefit. The company can then use the policy to help meet its obligations under the SERP.

Flexible and selective

SERPs are flexible and allow you to pick and choose participants. A SERP has only minimal reporting requirements, and there are no contribution limits.

Comparison of SERPs vs. qualified plans

If you have key executives you hope to retain long-term, a SERP is a very useful method of doing so. For more information, contact your financial professional.

You have invested so much to make your business a success. Have you considered what steps you need to take if you want to retire or need to sell the business? Planning for business continuation can help you harvest the value of your business when you leave the company.

How a buy-sell agreement works

A buy-sell agreement is a legal agreement that provides for the sale of business ownership interest upon the occurrence of a triggering event — such as the owner’s death, disability, or retirement.

You select who buys your business (possibly any co-owners), determine a fair purchase price and the way you, or your heirs, will be paid for your share.

There are different types of buy-sell agreements, but most use life insurance policies in some way as a funding source. Life insurance can be used to help pay off your business interest to you, or heirs, using the death benefit and potential cash value (from permanent life insurance).¹

Buy-sell agreements can help:

• Secure an orderly transfer: You and those purchasing pre-determine specific outcomes to create stability for your business and peace of mind for you.
• Access cash values for purchase: Using permanent life insurance can build accessible cash value that can help with the purchase price of the business.
• Lock in fair market value: Buyers and sellers agree to a fair price now, rather than waiting until a future setback could potentially reduce the asking price.

You should work with an attorney to implement a buy-sell agreement. Your attorney and tax professional can help make sure the arrangement aligns with your long-term planning goals.

Many small businesses share three common issues that can rob the owner of a good night’s sleep. But a bit of business planning with a financial professional can go a long way to help you regain control of your sleepless nights. 

Planning for business continuation

Planning for continuation of ownership in the event of retirement, disability or death is perhaps the fundamental need of any closely held business, especially one that has more than one owner.  

Solution: Most small business owners that plan for the transition of ownership use a buy-sell agreement that specifies the terms of buying out the interest of a disabled or deceased owner, usually with disability income insurance or life insurance, which provides a means for financing the buyout.

Protecting the operating team of the business

Every successful business has at least one key employee or contributor who is indispensable. What if that person died unexpectedly?

Solution: Life insurance can be used to protect against the financial costs associated with the loss of a key employee. Key person life insurance helps provide liquidity to sustain cash flow, keep accounts current, and cover the expense of seeking and training a replacement.

Recruiting, retaining, and rewarding key employees

It is tough to attract talented employees. The best people have many choices for employment and can command their desired compensation package.

Solution: Benefits such as an executive bonus plan, split-dollar plan, and supplemental executive retirement plan (SERP) are non-qualified fringe benefits that can be funded with life insurance to reward outstanding, key employees beyond their regular compensation.

There’s no better time to start planning for your small business! Talk with your AuguStar financial professional to get started.