When the time comes to sell a publishing company, it’s obviously important to extract maximum value from the business. Unfortunately, many exiting entrepreneurs (as well as their legal, financial, and business advisers) fail to recognize the enormous value hidden within one of their business assets: the business life insurance policy.
Even if you’re not contemplating the sale of your business now, statistics indicate that you may soon be thinking about ways to monetize business equity. Deloitte & Touche recently reported that “71% of small and mid-sized enterprise owners plan to exit their businesses within the next ten years.” Because only 30 percent of family businesses survive to the second generation and just 15 percent survive to the third, most companies are sold, or, if a sale isn’t possible, closed. Your business life insurance policy can be part of your exit strategy—a tool for leveraging assets to capture optimum value and for creating cash that will help expedite a sale.
Throughout the business cycle, companies purchase numerous business life insurance policies for risk management, employee benefit, and investment purposes. Examples include policies funding buy/sell agreements, key-person policies, split-dollar policies, policies securing business loans, policies funding retirement and employee benefit plans, and estate liquidity and equalization policies. Traditionally considered inflexible assets with little liquidity, they have long been viewed as necessary yet unrecoverable expenses.
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 policies may outlive their usefulness.
The Life Settlement Option
Imagine a world where you were only permitted to sell your house back to the builder, your automobile back to the dealer, and your stocks back to the issuing corporation. This is the world that life insurance policyholders traditionally encountered—a world with no secondary markets. Exiting entrepreneurs had limited options when changes rendered their business life policies unnecessary, and they didn’t want to continue paying expensive premiums. They could allow the policies to lapse, thereby forfeiting the value of all premiums paid. Or they could surrender the policies to the original insurance carrier for their cash surrender value.
Today, there is another option. You can use an innovative asset-optimization technique—a life settlement—to convert the hidden value in qualified business life insurance contracts to significant immediate cash, providing a much higher return on your investment.
A life settlement is the sale of a life insurance policy to an institutional investor for a cash payment that is greater than the policy’s cash surrender value. With a life settlement, when you no longer need term or cash value business life policies, you sell them for the highest-quality institutional offer and receive a lump-sum cash payment that can be used for any purpose, including facilitating the sale of your company for the price and terms you desire.
A Common Scenario
Three business partners, ages 69, 71, and 72, were the principals of a successful publishing company. To fund a buy/sell agreement, each partner owned two $3,000,000 term policies with no cash surrender value on the lives of the other partners. Seeking to sell their firm, these entrepreneurs received no offers that they felt were adequate.
Instead of lapsing the policies and receiving no return on the premiums they had paid for many years, these three wise men sold the policies to institutional investors in the secondary life insurance market and received cash windfalls of approximately $600,000 each.
By coordinating the sale of their company with the sale of their obsolete buy/sell business policies, the owners were able to sell their company quickly at a reduced all-cash price because the life settlement proceeds provided the money they needed to fill the gap between their original selling price and the offers from buyers.
Life Settlement Basics
Although life settlement viability is determined on a case-by-case basis, with all transactions subject to relevant legal requirements and underwriting authorization, the general purchasing parameters are: the insured is 65 or older; the policy’s death benefit is $250,000 or more; the issuing insurer is an A-rated company; and the policy has been in force at least two years.
No medical exams or extensive interviews are required, and there are no appraisal, application, or processing fees. The underwriting process involves only paperwork; you will need to provide documents such as your life insurance policy and in-force ledger and your medical records to verify the specifics of your insurance and health.
Corporate money managers invested $10 to $15 billion in life settlements in 2006—more money than in the previous seven years combined—because they are increasingly interested in purchasing pools of life policies to diversify their portfolios.
This means that the life-settlement industry has replaced a monopsony (an anticompetitive market situation in which a seller is permitted to sell to only one buyer) with a free-market alternative that lets companies compete to acquire the rights and obligations in your dispensable business life policies.
The good news is that this vibrant marketplace enables you to retrieve the fair market value from these otherwise illiquid business assets. With the average life settlement payout today being 20 to 25 percent of the face value, a life settlement can be an effective tool for liberating substantial liquidity hidden within a dormant business asset.
The bad news is that the life settlement marketplace is labyrinthine, and the nascent life-settlement industry, in general, is short on due diligence and transparency, as well as on knowledge of and services responsive to the unique needs of entrepreneurs who are selling their companies.
Rhona Sacks, an attorney and business coach, is the founder and president of Legal Life Settlements, a mergers and acquisitions advisory company specializing in helping retiring business owners extract maximum value from their hidden business assets. For more information, or to receive a copy of “10 Tips for Optimizing Your Life,” call 650/581-1596 or visit www.legallifesettlements.com.