Previously we discussed the components in using cash to help fund your Buy-Sell Plan. We first spoke about establishing a SINKING FUND which accumulates a cash account over a period of time. Then we discussed using a LUMP SUM balance. If neither of these two options work for you, there are other options. Let’s discuss them now.
You could additionally try to secure a BANK LOAN. Monies from the loan could be established in a special account and paid out periodically to the partner’s estate over a period of time. It goes without saying that you have to factor the interest paid on the loan. Furthermore, the departed partner’s estate, if savvy, will no dount want a larger amount as these payments are spread out over a period of time. This approach is often referred to as Installment Payments. We financial consultants commonly refer to this as the Time Value of Money. Of course, this approach can only be be used if the LOAN is approved. We all know how tight money is in this economy. In addition, I must say that in doing Business Succession Planning for twenty-nine years, banks are increasingly hesitant about approving loans when there is a major ownership change in a company.
There is another option that may work but could also present problems. The existing owners could take money from CURRENT PROFITS and give a fixed percentage to the departed owners estate. One obvious problem is what happens if you have a decline in profits? And even if you do have profits, would that be where you would like to pay-out periodically over what could be a lengthy time? While this could be a tax-deductible expense (PLEASE CONSULT YOUR TAX ADVSOR),it still could put a serious dent in the operating capacity of a company.
This leads to another problem. What if the departed partner/owner’s estate refuses such an offer and offers a counter proposal? For example, what would your reaction be if the estate said, “OK. Forget about the periodic payment. My therapist said I need to get out more so I’ll just come to work for you and you can pay a salary equal to the periodic payments.” Would you want a member of your departed partner’s estate working in your business? I can see only major conflicts. You work hard everyday and deal with a good number of issues that come across your desk. You certainly don’t need another headache. Now if you are very close to the departed members estate (they could even be family), this may work. At any rate I offer this as another possible other CASH OPTION.
Our next articles will continue with other funding options. I hope you find these articles interesting. I have tons of articles and brochures on Business Succession. To be part of my regular e-mails, please contact me at rfowler@americanportfolios.com. Also if you have an idea for a particular article, please let me know. I’m open to all suggestions. Thanks for your time and attention.