Buy-Sell "What If"

If you ask yourself why do I need a Buy-Sell Agreement for my Company, READ ON!

What Happens To A Balance Sheet When An Owner Dies?

Assumptions:

1. Buy-Sell Agreement Value $800,000 ($400,000 each)

2. No Life Insurance to Fund Agreement

Balance Sheet - Immediately Before Death
Assets		Liabilities & Stockholder's Equity
Cash	$150,000	Accounts Payable	$250,000
Accounts Receivable	350,000	Bank Note owed	100,000
Fixed Assets	300,000	Stockholder Equity	450,000
-----Total Assets	$800,000	-----Total Liability & -----Stockholder Equity	$800,000

Balance Sheet - Immediately After Death
Assets		Liabilities & Stockholder's Equity
Cash	$150,000	Accounts Payable		$250,000
Accounts Receivable	350,000	Bank Note owed		100,000
Fixed Assets	300,000	Amount Due
			Deceased's Estate	400,000
		Stockholder Equity		50,000
-----Total Assets	$800,000	-----Total Liability & -----Stockholder Equity		$800,000

Result: The corporation has booked a new liability - $400,000. Stockholder Equity has gone from $450,000 to $50,000. One key person is dead.

Query: If you were the banker...

1. How much money would you lend this company?

2. Would you release the estate of the deceased from the existing $100,000 note?

What Happens To A Balance Sheet When An Owner Dies With Proper Funding?

Assumptions:

1. Buy-Sell Agreement Value $800,000 ($400,000 each)

2. Life Insurance of $400,000 (each) to fund agreement

Balance Sheet - Immediately Before Death
Assets		Liabilities & Stockholder's Equity
Cash	$150,000	Accounts Payable	$250,000
Accounts Receivable	350,000	Bank Note owed	100,000
Fixed Assets	300,000	Stockholder Equity	450,000
-----Total Assets	$800,000	-----Total Liability & -----Stockholder Equity	$800,000

Balance Sheet - Immediately After Death
Assets		Liabilities & Stockholder's Equity
Cash¹	$ 550,000	Accounts Payable	$ 250,000
(Incl. Life Ins. Proceeds)		Bank Note owed	100,000
Accounts Receivable	350,000	Amount Due
Fixed Assets	300,000	-----Deceased's Estate	400,000
		Stockholder Equity	450,000
-----Total Assets	$1,200,000	-----Total Liability & -----Stockholder Equity	$1,200,000

Result:

1. The corporation has maintained a constant Stockholder Equity value of $450,000 by funding the agreement.

2. The corporation has purchased the deceased stockholder's interest without incurring a new liability.

Query: Isn't a banker more comfortable lending money to a corporation that completed a substantial buy-out without "booking" a new liability?

¹Assumes no corporate alternative minimum tax on insurance proceeds

This sales idea was provided by The Million Dollar Round Table (MDRT) and its members. It is an excerpt from a presentation made at the organization's Annual Meeting. This is for illustrative purposes only!

DenverWest Insurance Professionals, Inc.

Giving you a 3 Dimensional Approach for Addressing Your Financial Chaos!