Wayne Rooney, 45, recently lost his father and started thinking about his own mortality. He wondered if he had the proper plans in place to take care of his family and his business should something suddenly happen to him.
Wayne owns a sail making business with Ron Jacobs. He and Ron have been partners for almost 10 years, and about five years ago, Wayne was approached by his life insurance representative who asked him a few simple questions about his business:
1. Do you have a buy-sell agreement with your business partner?
2. Do you know what you could sell your business for today?
3. How would you protect your family in the event of your death?
4. Would you want to be partners with your deceased partner’s widow?
5. How would you protect your family in the event you become disabled?
With the help of a life insurance representative, Wayne and Ron put a buy-sell agreement in place, but it hasn’t been reviewed since. In the original agreement, the business was valued at $2,000,000, which was the book value at the time, but the book value has now grown to $2,750,000. Wayne assumed that this would be the right value for the business, but wasn’t sure. Also, Wayne and Ron assumed that there would be enough excess income from the business in order to make installment payments if the agreement was triggered, but after recently discussing this with their insurance representative, realized there could be cash flow issues in the future if there was another economic downturn.
Fortunately, through their insurance representative, they have access to buy-sell review and informal business valuation services. Through these services, they were able to determine that the more appropriate value of the company was $4,074,924 based on an average of five valuation methodologies:

Book Value: The value at which the business is carried on a balance sheet, with all assets adjusted for fair market value.
Straight Capitalization: The amount of capital that would have to be invested at a specified rate to yield the current average net annual earnings of the business.
Earnings Capitalization: Assumes that part of earnings are attributed to the assets of the business (book value). Remaining earnings are capitalized at a rate consistent with the relative risk of the business. The result is then added to book value.
Years’ Purchase: A conservative rate (the pure money rate for an investment with generally accepted lower risk) is used to determine the earnings attributed to assets. The balance is assumed to be provided by goodwill. The earnings provided by goodwill are then multiplied by the number of years for which goodwill is expected to be valuable to purchaser. The result is then added to the book value to obtain the valuation.
Discounted Future Earnings: Projected future business earnings are forecasted, and then discounted using an appropriate rate which reflects the return from the next best investment opportunity with a comparable level of risk. The sum of the discounted future earnings is the current valuation.
*Definitions provided by Principal Financial Group

Wayne and his business partner revised the agreement and decided to purchase insurance on each other for $2,000,000 each in case of an early death. In addition, they are looking into options concerning disability, and Wayne is also considering putting a supplemental retirement income plan in place, all as a result of reviewing and revising his business’ buy-sell agreement.
Rob Baldwin, CLU, CFP ®, your local Highland Capital Brokerage Sales Vice President, understands business insurance planning and is very excited to partner with Principal Financial Group ®, a leader in providing solutions for the business market.
Contact Rob Baldwin – 213.640.4356 or rbaldwin@highland.com - TODAY to get your complimentary Informal Business Valuation or Buy-Sell review!
The hypothetical case study results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some products. No representation is made as to the accurateness of the analysis. All guarantees are subject to the claims paying ability of the insurance carrier.
This material was created by NFP (National Financial Partners Corp.), its subsidiaries, or affiliates for distribution by their registered representatives, investment advisor representatives, and/or agents. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Neither NFP nor its subsidiaries or affiliates offer tax or legal advice.