Giving Scrutiny to Your Business Continuity

Here's the first of a four part series titled Giving Scrutiny to Your Business Continuity.

In 1979 a young insurance agent representing New York Life called on me. He didn't come with answers, but with questions. Before our half-hour meeting was over, Steve Garry had made quite an impression on me. 

When, a few years later, I was ready to aggressively update my personal and business planning, I called Steve. Since then we have turned a lot of sod, looking for opportunities to prepare for tomorrow. 

Steve's creative and informed approach to business and personal planning has distinguished him as a consistent member of the Summit Group, a group which includes only the top 100 agents among the more than 12,000 representing New York Life. He has not only helped in the organization of this Habit, but we have implemented every wealth-creating suggestion discussed. To us, "giving scrutiny to your business continuity" isn't an academic exercise—it's a real life opportunity. 

If you want to be an achiever, it's emphatically important that you plan. If you're already successful, the planning recommendations in this chapter are powerful enough to create significant wealth for you. 

If you have a business partner or partners, a Business Continuity Agreement is as important a business document as you will ever put your pen to. If you don't have a partner, the selective planning techniques described here will still be highly useful, though applied somewhat differently. 

Essentially, a Business Continuity Agreement keeps the company in the hands the owners wish. For the shareholder leaving the business, it provides a predetermined value and a waiting market. It also stipulates the terms of stock transfer and under what conditions a buyout is to take place. 

Would you like it if you were forced into business with your partner's spouse? How about an ex-spouse? Or how about the partner's child? Worse yet, your partner's five children, who were each willed 20 percent of your former partner's ownership? Even if you don't have a partner, dying without a stipulation of value may result in an expensive encounter with the IRS. The only way to avoid the consequences of the above illustrations is by having an up-to-date Business Continuity Agreement. 

Selecting the Right Agreement 

There are two types of agreements. One is the Cross-Purchase (Diagram B), which provides for the remaining shareholder(s) to purchase the departing shareholder's stock. The second type of agreement-the Stock Redemption Agreement (Diagram C) stipulates the corporation will buy the departing owner's stock. 

Both agreements are activated by a shareholder's death. The agreement obligates the estate of the deceased to sell its stock to either the remaining stockholders or the company. It also commits the continuing shareholders or the company, depending on the type of contract, to purchase all stock held by the estate. 

There are several circumstances, in addition to death, that would activate a properly designed and funded Business Continuity Agreement. They include: 

Shareholder disability 

Shareholder reaching an agreed upon retirement age 

Voluntary retirement 

Involuntary termination 

Business disagreements 

Transfer required by divorce 

Transfer required by personal bankruptcy of shareholder

Miscellaneous-any reason legally set in agreement 

Selecting the Right Professionals 

To select and create the right agreement for your situation you will need an attorney specifically experienced in estate planning. Since life and disability insurance usually fund an effective agreement, you will also need an insurance agent, preferably a Chartered Life Underwriter (CLU) and/or a Chartered Financial Consultant (ChFC). Insurance provides the funds to buy stock when the agreement is activated by one of the above circumstances or by death. 

Be careful in your agent selection. Find an agent with documented planning experience. Many simply aren't qualified to handle this type of sophisticated need. 

The agent and lawyer you choose should be asked to provide references that he or she is well versed in business insurance. 

Selecting the Right Insurance Company 

Question: If you buy a million dollar life insurance policy and the insurance company comes upon tough times, how much do you have at risk? The total premiums paid? The total premiums paid plus the cost of acquiring new coverage at your current age and health? Or a million dollars? The worst case answer is a million dollars, which could become reality if your timing was unfortunate. 

Never has the risk been so great you might outlive your insurance company. Therefore, never has the selection of an insurance carrier been so important. 

Major U.S. media markets are seeing and hearing unusual advertising messages these days. "If being exciting means investing heavily in junk bonds that end up in default," a New York Life ad says, "that's the kind of excitement we can all do without." Guardian Life ads boast, "No junk bonds? No junk real estate? No kidding!" Selecting the right insurance company is more complex than buying the cheapest or highest return policy you can get from a friend, neighbor, or relative. A whole lot more complex. 

We have heard of the many troubled life and property insurers searching for capital infusions, merger partners, and other forms of private financing to get them out of jeopardy. We're looking at the tip of an iceberg that will affect us for years to come.