Cashing Out: Hidden Business Assets
By Rhona Sacks, Legal Life Settlements
Have you decided to sell your company and retire? Congratulations! Now your primary goal is to extract maximum value from the business you’ve worked so hard to build. Unfortunately, too many exiting entre-preneurs (as well as their legal, financial, and business advisers) leave too much cash behind because they fail to recognize the enormous value hidden within one of their most overlooked and underutilized business assets.
Your Hidden Business Assets
Companies purchase life insurance policies for risk management, employee benefit, and investment pur-poses. When a company is up for sale, some of these life contracts may become obsolete because the reasons for their purchase are no longer relevant. And after a company is sold, additional business life poli-cies may outlive their usefulness.
Historically, exiting entrepreneurs faced limited disposition options when their changing needs rendered their life policies unnecessary: allowing the policy to lapse, thereby forfeiting the value of all premiums paid, or surrendering the policy to the original insurer for its cash-surrender value, an amount that doesn’t reflect its true value.
Today, an innovative asset-optimization technique called “life settlement”—the sale of a life insurance pol-icy to an institutional investor for a cash payment that is greater than the policy’s cash-surrender value—can convert the hidden value in no-longer-needed qualified business life insurance contracts into significant immediate cash. You can use this windfall for any purpose, including facilitating the sale of your company for the desired price and on favorable terms.
Although life settlement viability is assessed on a case-by-case basis, the basic requirements are the same. The insured is age 65+, the death benefit is $250,000+, and the policy has been in force for at least two years. The simplified underwriting process involves only paperwork, and there are no application or appraisal fees.
An Entrepreneurial Tale
Consider this case study. A 69-year-old principal of a successful company owned a $3 million key-person term policy (no cash-surrender value). Seeking to sell her firm, this entrepreneur received no offers that she felt were adequate for achieving her retirement and legacy goals. Unfortunately, her legal, financial, and business advisers were unaware of the enormous value hidden within this term policy.
By coordinating the sale of her obsolete key-person policy to institutional investors for $600,000, this happy entrepreneur was able to sell her company quickly at a reduced all-cash price because the life-settlement proceeds provided the money she needed to fill the gap between her original selling price and the offers from buyers.
Improve Your ROI—With Caveats
When you consider that the average cash-surrender value of a life insurance policy is only 4 percent of the face value while the average life-settlement payout is 20 to 25 percent, a life settlement can be an effective tool for liberating substantial liquidity hidden within a dormant business asset.
That said, although selling obsolete business life policies in the secondary life insurance market can be profitable, navigating the labyrinthine life-settlement marketplace can be challenging. The nascent life-settlement industry in general lacks ample due diligence and transparency as well as knowledge of and services responsive to the unique needs of retiring entrepreneurs who are selling their companies.
Safeguarding your privacy, securing the highest quality institutional offer, and coordinating the sale of your unnecessary business life policies with the sale of your company demands specialized advisory skills in business life insurance, exit planning, and life settlements. Working with an independent adviser who has expertise in these disciplines is the key to a successful, efficient transaction.
Get Your Deal Done
Every day, retiring business owners frustrated by inadequate purchasing offers for their firms unknowingly discard valuable capital assets by surrendering and lapsing their expendable business life policies. Selling these hidden assets can be the answer to easily getting your deal done.
Rhona Sacks, an attorney and business coach, is the founder and president of Legal Life Settlements, a mergers and acquisi-tions advisory company that specializes in helping retiring business owners extract maximum value from their hidden business assets. For more information or to receive a copy of the article “10 Tips for Optimizing Your Life,” call 650-581-1596 or visit www.legallifesettlements.com.