Business succession planning and the need for risk management

[Narrator] Business succession planning and the need for risk management.

If you are a business owner, at some point in the future, you may consider selling your business to a third party. Maybe you want to step away from the daily grind of operating a business. Maybe it's purely a financial decision to sell when the time is right. Whatever the reason, you'll want to maximize the value of the business so you can achieve the highest sale price. That could be through increasing revenue, lowering expenses, or investing in new markets, product lines, or services. Those are all important, but don't overlook the importance of risk management. Look at a potential sale through the eyes of your buyer. Their goal is for the business to provide them with a certain level of return over a period of time. The higher the return they expect to achieve, the higher the price they'll pay for your business.

On the other hand, the more risk they expect to take on, the less they'll be willing to pay. Some risks, like economic conditions or government regulations, are obviously beyond your control, but there are risks you can manage, starting with the risk that key employees could leave the company. Key employees can be some of your most important assets, because they often have the experience, unique skill sets, and business relationships that drive the profitability of a business. If key employees decide to leave because of a change in ownership, they can be difficult to replace, especially if the new owner isn't bringing their own key employees into the business. One way to help alleviate this concern is through a key employee compensation strategy that's designed to retain these employees, such as a nonqualified deferred compensation plan, restrictive bonus plan, or business continuation bonus plan. But along with employees leaving, you should also consider the risk that key employees could die unexpectedly.

To help mitigate that risk, your business could purchase life insurance on these essential employees for its death benefit protection, and if you choose indexed universal life insurance, the policy also offers living advantages such as the potential to build accumulation value.

[On-screen disclosure] The death benefit is generally income-tax-free to your beneficiaries. [End of on-screen disclosure]

[On-screen disclosure] Policy loans and withdrawals will reduce the available cash value and death benefit and may cause unintended consequences, including lapse or taxable events. Please see full loan and withdrawal disclosure within this material for details. [End of on-screen disclosure]

Any available cash value in the policy could be accessed through policy loans or withdrawals, and used to help fund your key employee compensation plan, allowing you the opportunity to accomplish two goals with one solution. Of course, as the business owner, you should consider life insurance for yourself as well. Of all the key employees your business has, it is very possible you are the most important of them all. The terms of your business sale could include a requirement that you remain with the business for a period of time as an employee or independent contractor. Having the business purchase life insurance for you, especially if you're at a more insurable age, can help mitigate that risk for potential buyers.

And that brings us to a third risk you can help manage, the risk that key employees could affect the earn-out price of your business. Earn-out terms are included in many business sale agreements and can adjust the sale price depending on how well the business performs after the sale. It can go up over time or down. So the better the business does after the sale, the greater value you'll receive as the seller. So if you have employees who are critical to the continued success of the business, you might consider adding another provision to the sale agreement that requires the business to retain life insurance on those key employees. After all, you've invested your time, your effort, and very likely, your dreams in building a business. And should you decide to sell your company, maximizing its value can depend on risk management. That's why your business succession planning needs to consider the contributions of key employees and the risks in losing them. Find out if indexed universal life insurance could be an appropriate way to help fund your business's risk management goals. Talk to your financial professional and your team of tax and legal professionals.

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Indexed universal life insurance is subject to health and financial underwriting.

Policy loans and withdrawals will reduce the available cash value and death benefit and may cause the policy to lapse, or affect guarantees against lapse. Withdrawals in excess of premiums paid will be subject to ordinary income tax. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. If a policy is a modified endowment contract (MEC), policy loans and withdrawals will be taxable as ordinary income to the extent there are earnings in the policy. If any of these features are exercised prior to age 59½ on a MEC, a 10% federal additional tax may be imposed. Tax laws are subject to change and you should consult a tax professional.

Allianz Life Insurance Company of North America does not provide financial planning services.

This content is for general educational purposes only. It is not intended to provide fiduciary, tax, or legal advice and cannot be used to avoid tax penalties; nor is it intended to market, promote, or recommend any tax plan or arrangement. Allianz Life Insurance Company of North America, its affiliates, and their employees and representatives do not give legal or tax advice. Customers are encouraged to consult with their own legal, tax, and financial professionals for specific advice or product recommendations.

Guarantees are backed solely by the financial strength and claims-paying ability of Allianz Life Insurance Company of North America. www.allianzlife.com

Products are issued by Allianz Life Insurance Company of North America, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297.
< a href="tel:8009501962">800.950.1962. www.allianzlife.com

This content does not apply in the state of New York.

AMK-520 (R-5/2025)

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