What Happens to Your Business if Something Happens to YOU?

Jim Lorenzen, CFP®, AIF®

Fotila Images

Fotila Images

I can speak from personal experience on this one. I’ve been a business owner for thirty-seven years, owning seven different businesses in three different industries; and my wife’s former husband passed away (unexpectedly) after building a chain of seven quality restaurants that stretched from El Paso, Texas to Northern California.

Experience teaches preparation.

If you’re a business owner or a partner in a business, have you asked yourself what would happen to your business if something should happen to you? Death and disability, are possibilities even if we want to avoid the thought. And, of course, some want to retire.

Does the business simply stop? If so, that may cause a lot of equity to simply be flushed away.
Does your partner’s spouse inherit your partner’s share? Do you want that?

Every objective brings with it issues you should consider:

Retain the Business for Your Family

• Is there a capable and willing family member?
• Will the family member be acceptable to any other business owners?
• How will you or your surviving dependents replace the income previously provided by your business?
• Is there a need to equalize inheritances among family members?
• Will there be enough liquidity in your estate to pay taxes and other settlement costs?

Sell the Business

  • To whom will your business interest be sold?
  • At what price?
    • What is the value of your business as a going concern?
    • How does that value compare to the liquidation value of your business?
    • How will you or your surviving dependents replace the income previously provided by your business?

    Will there be sufficient funds available to allow for a planned liquidation?

  • And at what events (death, disability and/or retirement)?
  • What is the value of your business interest?
  • Will the funds be available to complete the purchase at your death, disability and/or retirement?

Liquidate the Business

  • What is the value of your business as a going concern?
  • How does that value compare to the liquidation value of your business?
  • How will you or your surviving dependents replace the income previously provided by your business.
  • Will there be sufficient funds available to allow for a planned liquidation?

The objective of business continuation planning is to assist in evaluating which of these alternatives is most suitable for your situation and to help provide the funds that will be needed to assure that your business continuation goals become a reality.

Jim

Insurance Company Ratings May Not Be What They Seem!

Jim Lorenzen, CFP®, AIF®

Don’t believe beautiful illustrations.  They’re based on assumptions that can change.  Unless you know the probability of success in advance – not an easy thing to do – you may be buying a “pig-in-a-polk”, as we used say when I was in college back in Virginia.

Example:  Before Executive Life of New York went under, they had over 50% of their portfolio invested in less than investment grade ‘junk’ bonds, despite the fact that in June 1987, the New York legislature had mandated that insurance companies licensed to business in that state were to limit their general portfolios to no more than a 20% allocation to such bonds. Remember, there are no guarantees; there are only guarantors. [Source: The New Insurance Investment Advisor, Ben G. Baldwin, McGraw-Hill 2002, p. 37.].   Is your insurance agent a qualified investment advisor who knows what to look for “under the hood”?

Most of the well-known rating agencies we’re familiar with are actually paid by the insurance companies they rate.

Yes, you should read that again.

Little wonder many insurance companies that failed actually had good ratings when they went under.   My personal favorite rating agency is Weiss.  They receive no money from the insurance companies they rate – they’re paid by customers who access the ratings. Their ratings are called ‘safety ratings’ and they seem to be a little more stringent. For example, according to the September 2002 Insurance Forum, of 1221 life and health companies rated by Weiss, only 3.9% of companies made it into the ‘A’ category. Compare that with the 54.9% rated ‘A’ by Standard and Poor’s. At Moody’s, 90% of their list made it to ‘A’ that year. A.M. Best gave ‘A’ to 56.3% of the companies they rated.

The takeaway: You may want to be sure your agent is not only independent, but understands whether and how life insurance fits into your overall financial plan. Your agent/advisor should also khow the difference between a “highly-rated” company and an “investment grade” company.

Thought you might be interested.

Jim

“When the Market Goes Up, You Make Money! When the market goes down, you don’t lose!”

Fotila Images

Fotila Images

Jim Lorenzen, CFP®, AIF®

Sound familiar?  If so, it’s because you saw all those television commercials  selling safety to a frightened public.  After all, all those daily market gyrations are scary to an aging boomer population who’ve spent most of their adult lives getting their financial education from television gurus, talking heads, and financial (entertainment) magazines.

When in doubt, hide.  Buy gold,  buy silver, buy guarantees!  Maybe all risk will go away.  Maybe.  Maybe not.

Being conservative when inflation and interest rates have nowhere to go but up is probably a smart idea.   The question is, where does conservative leave off and ignorance take over?

What are those commercials really selling?  Equity-indexed annuities (EIAs).  Without getting to far into the weeds, EIAs are basically insurance company IOUs.  Your money is not invested in the stock market.  It’s loaned to an insurance company.  The insurance company puts the money in its general account and invests in a conservative portfolio, made-up mostly of bonds.

How do they tie returns to the stock market when the company has invested in bonds?  You can get my 3-1/2 page report here!

Jim