You’re a life insurance agent working in the business market. Today’s going to be a busy day, as you’ll be meeting with two prospective clients. Each prospect is a successful closely held business. And, in each case, you’ve been brought in by the company’s CFO, both of whom heard your presentation on the Connelly case to a group of business executives.
Each of the CFOs has been trying to get the owners of the companies to focus on what they term “buy-sell issues.” But it’s been tough to get and keep the owners’ attention on a subject they generally read as “peripheral.” The CFOs figure that now’s the time for the owners to hear from a professional voice about why the topic is anything but peripheral.
Preparing for the Meetings
You learned long ago that you have to set an objective for a meeting, a desired outcome. You’ll usually frame it this way, “At the end of the meeting, they will engage me to…” You can then construct and tailor the content and tone of your presentation, including your probing questions and, yes, even your disturbing points, in a logical, intuitive progression that leads the prospects to reach the “right” conclusion about the next step. This takes a lot of preparation.
Ever the professional, you appreciate that each CFO is taking some risk by bringing you in. So you want to cultivate these relationships carefully to gain their confidence. You have a call with each to start getting background for your meetings. You ask the CFOs for two kinds of background information. One is the basic information about the company, the principals, the ownership structure, the business, estimated value of the enterprise, the conditions in which it’s operating these days and so forth. The other is any background noise or personal dynamics that you should be aware of before walking into the room. Then you turn to the subject of buy-sell agreements and learn that the first company you’ll meet with has a buy-sell, while the other doesn’t. More on preparation when we get to each company.
As though reading from the same script, both CFOs tell you that they’re not bringing you in to educate the owners. They’re bringing you in to disturb them, to make them uncomfortable with the status quo. If they’re not disturbed, if they’re not uncomfortable with the potential consequences of the status quo, they won’t move, and the CFOs will have failed. “Here’s the deal,” they say, “Watch the owners’ body language. If they’re looking at each other while you talk, you’re okay. If they’re looking at their phones, you’re not.”
The First Company
As noted, the owners have a buy-sell agreement. And, says the CFO, they’ve even funded it with “some” term life insurance. You ask for a copy of the agreement and for some information on the policies, like maybe the original illustrations and most current statement from the carriers.
So far, so good, but then the CFO tells you that the agreement has basically sat in the file for years, with no one attending to the usual requirements about valuation and so forth. Try as he might, the CFO has been singularly unsuccessful in getting the owners to review and refresh the document and the ever-increasing shortfall in funding.
With the CFO’s permission, you forward the agreement to your advanced sales group for a technical review. Bearing in mind the CFO’s emphatic underscoring of your mission for the meeting, you’ll use the review to create a crisp summary of the agreement to lead off the meeting, something along the lines of, “Here’s how this thing works in the event of your death or other separation from the company…” Your summary will address the working parts of the agreement and then the parts, facts and circumstances that don’t work, like:
- The totally out-of-date valuation of the business that would result in chaos and some pretty difficult conversations between the company and the departing owner or their estate,
- The far too short list of triggering events and the implications of an underfunded buy-out to the buyer, which in this case is the company and the seller, which in a worse case is the departed shareholder’s estate, and
- A lender, for example, that might be concerned about all kinds of things, including, the void in management created by the loss of the owner and the strain on the business from the buy-out. And, not to put too fine a point to it, what if the departing owner was the one individual who had the key relationship with that lender?
You’ll then turn to the funding, which in the case of death, would be one part life insurance and one part promissory note. You’ll walk through the issues associated with a multi-year payout of the uninsured portion of the sale price. “Since you could be on either side of the table when this happens, are you comfortable with the financing implications of the down payment on the payout and then paying the estate of a deceased owner (meaning your family), a secured creditor of the business by the way, for X years. On the flip side, have you thought about and are you comfortable living with all that can wrong in the 10 years that your estate (meaning your family) is relying on installment payments at Y% provided in the agreement? Do you really want to put the business and your family, respectively, in that position?” Hopefully, at that point, they’ll be looking at each other and not at their phones!
You’ll spend surprisingly little time on the life insurance. That’s because you’ll describe how the policies work, with emphasis on what happens when the fast-approaching level term period runs out and the premiums do their best imitation of a space shot. You’ll tell them about how you’d proceed on their behalf to explore options for maintaining coverage.
You close with a summary of the steps you recommend they take, including:
- Have the agreement reviewed by their attorney and their tax advisor, respectively, for its efficacy from the legal and tax perspectives. Is it the right type of agreement for the company at this juncture, does it include the necessary provisions and are the tax implications to seller and buyer understood and acceptable? An alternative form of agreement may be preferable now.
- Get an updated valuation or updated valuation methodology. It’ll be a lot easier to agree on a value now than after one of them… departs.
- Proceed with informal underwriting so that you can report back to them with the projected cost of maintaining (and perhaps increasing) the coverage on a per $1,000 of coverage basis.
That’s it. It’s a classic case where less is more. And now, the owners are looking at you and the CFO, “What are you waiting for? Let’s go!”
The Second Company
This is a newer company, owned by three individuals who are considerably younger than those who own the first company.
In your preparatory call with the CFO, you learn that the three owners, who’ve enjoyed success from shortly after their start-up days, are laser focused on building their brand and market share. They’re also young and healthy enough to think that mortality is a matter of if, not when. The CFO has tried to talk with the owners about a buy-sell agreement, but he’s been rebuffed by the owners’ contention that their incorporation documents, operating agreements and whatever else contain all the “buy-sell” provisions they need. And funding? There’s none. Not that this hasn’t been mentioned, but they just don’t see the need for it, and, frankly, don’t even want to talk about it. They’re busy!
As before, you ask to see the operative documents, noting that you’ll share them with your advanced sales team. Once you get the team’s summary of the “working parts” of the documentation that would govern the parties’ rights and obligations in any “what if” scenarios, you prepare your presentation.
Knowing that the owners have agreed to the meeting as a courtesy to their CFO and that they’re not likely to have much attention span for the topic, you take a Shakespearean approach. If brevity is the soul of wit, you’ll be hilarious. So, you’ll lay out in plain, concise and frank terms what would happen if any one of them were to pass away, let alone become disabled. You’ll set out in a logical, linear fashion what such an event would mean for the company, the surviving owners and the estate or family of the deceased, respectively.
Your talking points are carefully selected and curated for utmost disturbance, as requested by the CFO. Though you’ll speak in business-like terms and ask them to consider business-like implications, you know they’ll be thinking in terms of money, politics, personalities and, well, money. You’ll ask them to think about the implications of:
- The deceased’s executor, trustee or spouse joining them at shareholder meetings,
- Negotiating a buy-out in real time with real people who have real stakes in the outcome,
- Finding the cash for the buy-out, especially at a time when the business has lost one of its three guiding lights, and
- Their family’s holding a promissory note from the company or the remaining shareholders for many years, subject to all the vicissitudes of business conditions and risks.
Again, ever the savvy professional, you’re all too aware of how easy it is to get too technical and infuse too much jargon into a presentation like this one. So, you ask one of your younger colleagues to listen to the presentation and push the “stop” button if they think you’re crossing the line from practical to pedantic.
At the close of this presentation, you’ll once again look for a consensus to move forward, much along the same lines as earlier and involving many of the same topics, advisors and processes. One critical difference is that this case may involve a quick stop-gap life insurance solution to hold the fort while the potentially lengthy process of designing and properly funding the buy-sell unfolds.
These meetings present you, or any agent, one of the great challenges of your profession, namely, to convey urgently important material in terms that an audience unfamiliar with the concepts and the terminology will still understand well enough to make an informed decision to take action. Your material is the science. Your delivery, the art. Your ability to blend them into a cogent, persuasive presentation is the pinnacle of your craft.