Business succession planning often hits the rails when there is no family member willing to take on the risk. Or, who has the financial capacity to do so. Even with a gradual change in management, and a well-funded BuySell agreement in place, problems can still occur.
Small businesses often struggle finding funding for growth, and replacing the business owner with someone with less experience and a possibly unspectacular credit history, can close the doors on most options. Funding for business growth is just one of the major concerns facing a business successor. For business continuation in an ever changing marketplace, access to capital is often needed just to keep up with the competition.
Funding a BuySell agreement with a permanent cash value policy with maximum deposits allows the growth of a secondary asset in the hands of the successor. It gives them secure collateral that can be leveraged if needed. Borrowing against cash value life insurance policies for business funding is not a new concept. Walt Disney did it in the 1950’s to build Disneyland after every other financing option failed. Ray Croc borrowed against multiple whole life policies to pay for key employees and create the marketing campaign that catapulted MacDonald restaurants into the legendary fast food franchise they are today.
Using life insurance as an ‘asset class’ offers you multiple benefits. Specific life insurance products have tax-sheltering advantages (important with larger investment portfolios). Depending on the product, you can also build a well-diversified portfolio within that tax shelter, accelerating growth. Not all permanent products offer the same options. But funded early (while the successor is young and healthy), the actual insurance cost can be low enough to build significant cash values over time.
Even if the situation requires buying term insurance to initially fund the BuySell Agreement, it is important to make sure the term product is able to be converted to the permanent product you want and need, without additional underwriting or medical requirements. Every insurance company has different offerings so make sure you discuss your needs and expectations thoroughly with a life insurance professional able to search the market for the best fit.