Financial advisors routinely refer their business clients to certified business appraisers to undergo a formal business appraisal.
Examples of situations that trigger business appraisals include the owner’s decision to retire and sell the business; a decision to transfer ownership; company mergers; litigation, divorce, bankruptcy, and taxation issues.
A business appraisal involves a complex process and the items on the checklist of documents required for an appraisal are numerous. Appraisers must scrutinize everything from detailed annual financial statements involving assets and liabilities, to accounts receivable, supplier agreements and everything in between.
Notably at the top of the list of assets to be appraised is life insurance. The certified business appraiser will require a schedule of life insurance in force on the company’s officers and shareholders in order to examine the ownership and face amount of policy; type of policy; cash surrender value (if any); amount of annual premiums; and the identity of the beneficiaries.
Many business valuation practitioners who specialize in transaction based mergers, acquisitions, divestitures, buy-sell agreements, leveraged buyouts, insolvency and bankruptcy, debt and equity financing and other business proceedings may not be aware of the pivotal role they can play as it relates to uncovering the asset optimization potential of life settlements for obsolete business-owned and key man policies.
Most key man policies were purchased to fund buy-sell agreements and as a mechanism to protect against business succession risks. If a covered business owner dies, the key man life insurance policy can guarantee that funds will be available to fulfill the terms of the agreement.
But what happens when the key man decides to retire or sell the business and the policy is not longer relevant? Surrendering the policy or allowing it to lapse could leave huge sums of money on the table if the insured qualified for a life settlement.
For retiring business owners who are saddled with premium payments for key man policies they no longer need, selling the policy in the secondary market may be the most financially prudent option. The cash proceeds from selling the policy can be used to address a variety of business succession challenges, such as boosting the severance package for the departing business owner or key executive, to liquidating company debt for the new owner. (Click here to read case summary involving the sale of a key man policy.)
Rather than allow the key man policy to lapse, business valuation practitioners should contact Asset Life Settlements to request a free policy appraisal.
The robust economy and the record pace of retiring business owners are spurring an increased number of business start-ups, scale-ups, and cash-outs. Decisions relating to the proper level of life insurance coverage will be at the heart of many business-related decisions, including whether a life settlement is the best option for obsolete key man policies.
(Click here to learn more about this topic.)
Although the nexus between business valuation and life settlements for obsolete key man life insurance policies may be obvious to insurance advisors, many business appraisers are not aware that the secondary market for life insurance is an option for business executives to optimize and monetize the value of obsolete life insurance policies.
Contact Asset Life Settlements to learn more about the secondary market for life insurance, or to request a policy appraisal for retiring business owners with key man policies.