Episode 51: Why Buy-Sell Agreements Don’t Work – And What To Do About It

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In the latest episode of The Canadian Wealth Secrets podcast, we dig into the often-overlooked world of buy-sell agreements—a crucial aspect of business ownership that can either safeguard your financial future or if missing or poorly written, can lead to unforeseen challenges.

Your company’s buy-sell agreement, sometimes known as a buyout agreement, a business will, or a business prenup, could be the linchpin in determining the fate of your business when ownership changes hands due to various events like death, partnership breakup, sale, or divorce. Join us as we demystify the complexities of these agreements and give you practical next steps to make your buy-sell agreement strong! 

What you’ll learn:

  • Demystifying Buy-Sell Agreements:
    • Gain a clear understanding of what a buy-sell agreement is and why it’s a pivotal document for business owners during key events such as death, partnership breakup, sale, or divorce.
  • Steering Clear of Common Pitfalls:
    • Discover the three most common mistakes businesses make in their buy-sell agreements and learn practical strategies to avoid them:
      • Mistake #1: Neglecting to Address the Sale of the Company
      • Mistake #2: Using an Inadequate Valuation Method
      • Mistake #3: Lack of Clarity in Agreement Form
  • Navigating Valuation Methods:
    • Understand the pros and cons of different valuation methods, empowering you to choose the approach that best aligns with your business needs.
  • Exploring Buy-Sell Agreement Forms:
    • Dive into the different forms of buy-sell agreements, including entity purchase, cross purchase, and the advantageous wait-and-see method (BOB), and grasp the financial and tax considerations associated with each.
  • How To Protect Yourself and Your Company:
    • Learn tools and strategies that will give you the necessary resources to navigate and fund a buy-out in the untimely death of a shareholder.

Resources:

Opportunities, Services, and Consulting:

For those interested in being considered for potential Joint Venture (JV) opportunities, reach out to us here.

Contact Matt if you’re Buying or Selling Real Estate in Windsor or Essex County!

Reach out to Jon if you’re looking for an Ontario Mortgage, Ontario Mortgage Refinance or a HELOC in Ontario.

Get in touch with Kyle to begin your journey through his Canadian Wealth Planning System.

Check out the work Jon and Kyle do assisting mathematics educators and district leaders.

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00:00:00:03 – 00:00:24:20
Kyle Pearce
And this will be important not just for this specific scenario, but for other scenarios that we’re going to address, is addressing the actual valuation of the company. So having a metric that will help us to evaluate or evaluate the value of our company at any given time. Now, there’s different ways you can do this. You can do this each year.

00:00:24:20 – 00:00:48:21
Kyle Pearce
Let’s say that you commit that every single year we’re going to update manually. We’re going to come to terms on a value of our company and we’re going to go, Hey, the company, Is this from there? You could then say if anyone approached us with an offer to purchase for blank, we take it. And if it’s less than blank, we don’t take it.

00:00:48:22 – 00:01:07:23
Kyle Pearce
You could do that, right? You and I haven’t done that to that level of specificity, but you could do that if that’s what you need to do.

00:01:08:00 – 00:01:14:21
Kyle Pearce
Welcome to the Invest in Teacher podcast with Kyle Pearce, Matt Biggley and Jon Orr.

00:01:15:02 – 00:01:23:09
Jon Orr
Get ready to be taught as we share our successes and failures encountered during our real life lessons. Learning how to build generational wealth from the ground up.

00:01:23:11 – 00:01:50:02
Kyle Pearce
Well invested students to another episode of the Canadian Wealth Secrets podcast today. Sadly, Matt was called in to He called me this morning and said he feels like he’s back in the education space, going to do some professional development or professional learning, as we often do in that space. But he’s doing it on the realtor side of things. So there’s some new rules, new regulations going in.

00:01:50:08 – 00:02:15:02
Kyle Pearce
I’m sure anyone in the real estate industry here in Ontario are aware that there are some changes that have been put into effect. Some people are excited about, some they are not. But that’s not what we’re here to talk about. We’re actually going to be diving in to the idea of buy sell agreements when it comes to our businesses, when we have partners specifically.

00:02:15:02 – 00:02:23:09
Kyle Pearce
This typically happens when we have some sort of privately held corporation where there is more than one shareholder.

00:02:23:11 – 00:02:45:01
Jon Orr
Mm hmm. Mm hmm. Yeah. And I think this is a really important topic because if you had you have a corporation where you have more than one shareholder and you’ve not thought about a buy sell agreement, or if you’re not sure about how solid your buy sell agreement is. In this episode, we want to talk about common mistakes in buy sell agreements and how to strengthen them up.

00:02:45:01 – 00:03:00:24
Jon Orr
So if you actively involved in your buy sell agreement and you probably should have been, especially as a shareholder in a private corporation, then you are going to want to listen up. You’re going to want to go like, wait a minute, did I think of that? Did I include that? Did my lawyer think of that and do my lawyer include that?

00:03:00:24 – 00:03:21:00
Jon Orr
So we’re not lawyers, but we have gone through this process. We consult with people regularly about their corporations structure to minimize their taxes. And this often comes up because it’s like, wait a minute, like if we’re going to go down that route for corporate tax savings, we do want to talk about what’s happening with your buy sell agreement so that we can plan accordingly.

00:03:21:00 – 00:03:31:20
Jon Orr
So we’ve got some strategies, we’ve got some common mistakes that people or corporations have put in their buy sell agreements. We want to talk about them so that you don’t have these same mistakes in your solid and you’re ready to go.

00:03:31:23 – 00:04:11:13
Kyle Pearce
I love it. I love it. Yeah. And just to kind of reiterate, every time we get on a call and we are chatting with business owners, particularly business owners that own shares in their business in a corporation, and there’s more than one shareholder. We actually a lot of times our focus sort of pauses. The initial call was not intended to talk about buy sell agreements, but it’s a question that we always ask because it’s something that is easy, is maybe the wrong word for it, but it’s something that you can do relatively quickly, is to review your buy sell agreement or to ensure one exists.

00:04:11:13 – 00:04:33:18
Kyle Pearce
So the first thing we do is ask, Do you have one? And for a good chunk of the business owners that we chat with, they have more than one partner. Even if it’s a spouse. So this is for people who are like, Well, I don’t really need one because it’s just like I own half of the shares of the Corp and my wife owns or my partner owns 50%, the other 50% of the shares in the Corp.

00:04:33:18 – 00:05:03:21
Kyle Pearce
So we don’t really need one. Well, in reality, you actually want one. You want to have it super clear. We’re going to talk about some of the things you want to have. So you do want to have one. And then for those who do have one, we always ask them and we say, So what’s in it? And for most business owners, they’re sort of like, I know we put one in there when we opened the corporation, but you can imagine how there’s so many other details happening at the time, right?

00:05:03:21 – 00:05:30:24
Kyle Pearce
You’re like going through the articles and all of these pieces. Like what kind of shares should they be? Pref shares, common chain, all those things are happening. And then the buy sell is something that oftentimes sort of gets slipped in. And as my senior partner on corporate advisors scored, he always says, what’s like the lawyer and he is not picking on lawyers just lawyers have this template and he’s like, they go to the bottom drawer and they pull it out and they dusted off and then they place it on the table.

00:05:31:01 – 00:05:43:23
Kyle Pearce
And then you as the business owner are kind of looking at it and they explain it in a very, very high level summary. And then you as a business owner go, I guess it’s good because I actually don’t know what else it should have.

00:05:44:00 – 00:05:45:06
Jon Orr
You’re the professional here.

00:05:45:06 – 00:06:11:17
Kyle Pearce
Exactly. So then it and it gets filed away. And again, not picking on any professionals out there, but if you don’t go down a very, very clear set of questions and really start thinking about the different possibilities that could happen, we’re not saying that we want them to happen. It’s like anything when you’re trying to protect yourself, you’re trying to protect yourself from this scenario that you don’t want to happen.

00:06:11:19 – 00:06:27:07
Kyle Pearce
So, John, you and I, when we had put together our corporation, our active corporation, you and I sat down and I remember us kind of engaging in the same process. We just sort of went, Yeah, okay, sounds good. Like, is this what we do? And the answer was, Yes, you should have a buy. Sell. Okay, let’s do that.

00:06:27:07 – 00:06:50:09
Kyle Pearce
We put it in. Never really paid any attention to it initially. But the problem comes when something actually happens beyond your control. Now, at the time when you’re starting a partnership in your mind, you’re like, Well, of course we’re not going to ever get in a fight. We’re never going to want to leave the corporation or leave this partnership because you’re at the beginning of the journey.

00:06:50:09 – 00:07:11:16
Kyle Pearce
If you’re already feeling that way, you wouldn’t be at the tables. But the reality is it could happen. And let’s be honest, there’s other scenarios that could happen as well. And when they do happen is not when you want to be trying to figure out how it’s going to look and sound, because that’s when legal fees come in and delays and fights.

00:07:11:16 – 00:07:36:05
Kyle Pearce
And I thought this and oh, I didn’t know you were thinking that you want to make sure that it is taking care of in this agreement so that if by chance we hope it doesn’t, but if by chance it is ever necessary that there is no lack of clarity and that things happen in a way where you know exactly what’s going to happen, because we already discussed this well in advance.

00:07:36:07 – 00:08:03:20
Jon Orr
If you don’t have a buy sell agreement, you’re like, wait a minute, I don’t have one. And I’m not sure exactly what that is. I think you’ve pretty much outlined really what that is. And then that last kind of statement that you made is thinking about it’s almost like a prenuptial agreement, right? You’re entering into this partnership and you want to think about down the road if something happens, if one of us dies, if we decide to break up, I no longer want to be part of this corporation.

00:08:03:22 – 00:08:28:05
Jon Orr
What is in place. And that’s what your buy sell agreement is doing. It’s setting up the provisions to go. If we decide to one of us, or more than one of us moves on from this, there is a partnership breakup. There is that death or maybe this is actually it leads into this mistake. Number one, what happens if I want to sell my ownership in this corporation, which is kind of like my partnership breakup?

00:08:28:05 – 00:08:50:23
Jon Orr
It’s like there’s no hard feelings here, Kyle, between you and me. But what happens if I get in a tough spot where I want to sell my share to you? Say, reap some of those benefits, and I’m out. What does that look like? That’s what the buy sell agreement is. It’s a legal document that outlines what happens if we are moving on or one shareholder or more than one shareholder decides to move on.

00:08:50:23 – 00:08:57:12
Jon Orr
So let’s jump right into that mistake. Number one, many buy sell agreements are not addressing the sale of the company.

00:08:57:12 – 00:09:20:08
Kyle Pearce
CO Yeah, absolutely. So let’s let’s chat a little bit more about that. Now there are nuances here as well, because even if we talk about the sale of the company, the sale of the company is less difficult when everyone’s in agreeance, right? So everybody’s in agreeance. We’re good to go. So for you and I, we are a two person team here.

00:09:20:14 – 00:09:41:20
Kyle Pearce
We basically have all the say. And if, let’s say a company was to come up and we’re speaking specifically to our online math consulting business and all of those things that we had built up over the past decade, let’s say you and I are going, you know what? We’ve done great work there. We love it, but we actually want to shift our thinking towards something else, right?

00:09:41:20 – 00:10:05:24
Kyle Pearce
We’ve got one of these lives. We’ve talked about it on previous episodes, and we want to just explore other options. You and I are both on the same page and that’s great. We can decide in that moment what the value of that company is, right? We can go. Do we think like, would we be okay if a company ABC over here wants to buy us out and buy all of our shares?

00:10:05:24 – 00:10:28:20
Kyle Pearce
So they’re going to buy my shares. They’re going to buy your shares and they’re going to essentially take over this company. They’re going to eat this company up and it’s now theirs. That’s something that we could decide together. However, that could also lead to a partnership breakup from the Perspect of that, I want to sell more than you want to sell.

00:10:28:22 – 00:10:47:17
Kyle Pearce
And that can be the first challenge here that we dig in to you. So company ABC comes in and they go, Hey, we’re willing to buy your company for blank. And you go, I don’t think it’s enough. I really don’t think it’s enough. I think our company is worth more. And I’m going, John, come on now. The company.

00:10:47:19 – 00:10:52:17
Kyle Pearce
I think that’s a great offer. I think we should take it now. What happens.

00:10:52:22 – 00:11:08:07
Jon Orr
Right? Yeah. So it’s like now it’s like, okay, well, Kyle, if you think so, go for it. But you’re going to buy me out. What is that provision? Is that a mandatory provision that we need to write in? What do we want to happen if a sale of our company comes down the pipe?

00:11:08:11 – 00:11:32:15
Kyle Pearce
So here’s one thing, and this will be important not just for this specific scenario, but for other scenarios that we’re going to address, is addressing the actual valuation of the company. So having a metric that will help us to evaluate or evaluate the value of our company at any given time. Now, there’s different ways you can do this.

00:11:32:15 – 00:11:55:11
Kyle Pearce
You can do this each year. Let’s say that you commit that every single year we’re going to update manually. We’re going to come to terms on a value of our company and we’re going to go, Hey, the company is this. From there you could then say, if anyone approaches us with an offer to purchase for a blank, we take it.

00:11:55:13 – 00:12:19:16
Kyle Pearce
And if it’s less than blank, we don’t take it. You could do that, right? You and I haven’t done that to that level of specificity, but you could do that if that’s what you need to do. On the other hand, you might want to decide to use some sort of calculation. And this calculation could be really helpful, especially for some of the other reasons why we might have a buy sell agreement trigger.

00:12:19:16 – 00:12:45:07
Kyle Pearce
And we’ll talk about those in a minute. But this lack of having a valuation method in place can often lead to challenges because again, if we don’t actually state this, if we don’t come together once a year, we don’t have a calculation, a formula that actually tells us how much our company is worth to each other when the opportunity or when we are forced into some sort of sale.

00:12:45:09 – 00:13:04:15
Kyle Pearce
You may have differing thoughts because we’ve never talked about them. So, for example, I might think that our company is worth $5 million and you might in your head think, no, think of all the growth we have. All of these metrics suggest that we’re going to hit 10 million before blah, blah, blah. So I think it’s worth 10 million today.

00:13:04:17 – 00:13:24:22
Kyle Pearce
And that’s a big gap between our thinking. So what we could do is we could actually make a formula. We could come up with a formula, we could look for formulas online. Some people use top line revenue. I think that’s a little risky, right? Because top line revenue is like how much money is coming in, but how much money is going out the back door, Right.

00:13:24:22 – 00:13:42:04
Kyle Pearce
So you could do that, John, What has been sort of a good formula that we see a lot of solid buy sell agreements, sort of leaning on if you want to go to a formula that will value your company for you so that there’s really no debate.

00:13:42:06 – 00:13:57:12
Jon Orr
I think what you’d want to do in that case, because if you wait, right, this is the downside, right? If you wait to figure out the value of your company in the moment, it’s like you said, there’s going to be disagreements. It’s going to be like, wait a minute, but I’m going to value at high or do I value it low?

00:13:57:14 – 00:14:15:18
Jon Orr
That’s the other thing to think about, too. Before we talk about the formula, it’s like, okay, if I want to stay with the company, I want the value of the company to actually be calculated or valued lower than, say, earnings or revenue, or because I know things are going to be back there, but I want to pay less if I have to buy someone out.

00:14:15:20 – 00:14:37:11
Jon Orr
Right. And if I’m on the way out, I want my company to be valued high. So this is why it’s important to have this written in your buy sell agreement is to figure out how are we valuing our company. And if you want to go to the formula route, you know, if you want to go to to say one way you could do it is that every year, every two years, you could all sit down and go, How do we value the company?

00:14:37:15 – 00:14:58:20
Jon Orr
Can we come up with a value of the company? If you come up with the value of the company, then you write it in your buy sell agreement. But then you’re in the process of updating your buy sell agreement every single year or every two years. You’re calling your lawyer, you’re getting it done. It’s all get in place unless you go to the formula method, which is is thinking about a multiple a multiple of a particular metric.

00:14:58:20 – 00:15:16:12
Jon Orr
And you can pull from your financial statements every year so that you don’t have to continually update the buy sell agreement. The buy sell agreement has the formula. It says, Hey, go and look at our last financial statements or an average of our last two financial statements and go, it’s going to be two times EBIDTA or it’s going to be three times or five times.

00:15:16:13 – 00:15:36:07
Jon Orr
You have to decide that still together, when you go to write your buy sell agreement in IRA is earnings before the interest that you owe the taxes, you owe the depreciation on your assets and also the amortization. And so you want to think about what is that You can calculate that number like that’s a set number that your financial statements are going to dictate to you.

00:15:36:09 – 00:15:54:07
Jon Orr
So that’s why it’s like it’s really nice to go, Well, I don’t have to go do the updates. It’s just that’s what we calculate it to be. And you be if you say we’re worth two times that, then every year you’re like, Well, we grew, so now we’re worth two times the new number. And every year, you know, you check and you’re like, Hey, we’re happy with always two times.

00:15:54:09 – 00:16:16:16
Jon Orr
EBIDTA So that can be something that you stick with. But that would be, say, our recommendation to go, this is the way you might want to value your company and have it written right into your buy sell agreement so that you know exactly if someone’s if someone’s has a death, you know, how much is the company worth so that we can give them their shares or buy their shares out?

00:16:16:18 – 00:16:37:21
Kyle Pearce
I think that’s one I’m happy you mentioned about death, because I think that’s one of the ones that is, Sure, maybe your partnership is strong and you don’t anticipate that you ever will have a partnership break off or that one partner decides they just want to pursue something else in life. I mean, I still think that’s possible. We don’t know who we’re going to be in ten years, Right.

00:16:37:21 – 00:17:01:17
Kyle Pearce
So, again, it doesn’t have to be on bad terms. So I think it’s still important. But what about the untimely death of one of the shareholders? Right. So if there’s an untimely death, you don’t want I know for me personally, I would not want to be sitting at a table with your wife to have a discussion about what we think the company is worth In her mind, she’s gone.

00:17:01:17 – 00:17:24:24
Kyle Pearce
I just lost my spouse. My spouse used to commit almost every waking moment of his life, pouring his soul into this company. And now we’re going to talk about what that’s worth, right? I’m guessing that’s going to be hard, right? That’s a hard, hard conversation. But on the other end, it’s like I can’t pay this amount of money because I just don’t have the opportunity to or whatever it is.

00:17:24:24 – 00:17:40:05
Kyle Pearce
And I want to keep the company going. Now I’ve got to hire somebody. I have to not only find someone that can replace the work that you do in the company, which is very different than the work that I do. And I have to not only find them, but then I’m going to have to pay them something, right?

00:17:40:06 – 00:17:56:07
Kyle Pearce
I’m going to have to either pay them a salary or I’m going to have to give them shares. Right. Which maybe are part of the shares that I’m hoping to bring back to the company so we can keep this thing going on. And that’s without even worrying about mourning and all the other emotions that you’re going to feel.

00:17:56:09 – 00:18:24:08
Kyle Pearce
So by having a formula, it definitely helps so that everybody’s clear and even spouses and other partners should probably in on that conversation, too. Just so it’s not like a surprise, right, In terms of what’s going to happen, it’s like, hey, it’ll be cut and dry. And the one benefit there is that you don’t know what side you’re going to be on, so you tend to pick something that’s going to be more reasonable regardless of the side you’re on.

00:18:24:08 – 00:18:45:23
Kyle Pearce
So what I mean by that is I’m not going to go, Well, hey, listen, if I die, I want the multiple to be ten times better, right? I want it to be this massive number so that my family benefits significantly because it could actually be on the other side where then it’s like, wait a second. Now I’m also having to do that on the other end for the other family.

00:18:45:23 – 00:19:13:03
Kyle Pearce
So it’s really about coming together and going what’s reasonable? And then I think most importantly, especially from the death side on the partnership side, deciding how your buyout, the other partner, especially if one of the partners, if your buy sell agreement allows a partner to get out your buy sell agreement could state that that at any time, 12 months in advance, a partner could elect to sell their shares back to the company.

00:19:13:05 – 00:19:40:00
Kyle Pearce
Right. I don’t recommend that, to be honest, because again, it’s like where is the company going to get the money from? However, when there’s an untimely death, that gets hard because the family either one of two things happens. If we don’t have a buy sell agreement in place and I was to pass or I were to pass my shares are going my shares in my company, which are held by a holding court, but we’re not going to get into the money ness of that.

00:19:40:02 – 00:20:05:05
Kyle Pearce
But my shares are going to get passed my estate and if there’s no buy sell agreement, forcing the sale back to either the company or to one of the other or all of the other shareholders, if we don’t have that in place, my estate now becomes a partner. And I don’t know about you. You didn’t sign up to be in partnership, up to be embed with.

00:20:05:07 – 00:20:20:08
Kyle Pearce
I mean, we’ve never really been in bed together. But you know what we’re talking about here. You’ve never really signed up for that estate to be a partner in your business, Right. So we need to make sure that this is clear. And then how are we actually going to fund it?

00:20:20:10 – 00:20:37:08
Jon Orr
You’re right. The bypass you didn’t sign up to be in business with my family Might be my kids or my wife. Whoever survives, I love them. Exactly. And it’s not like we’re just shareholders of a corporation where we don’t have any controlling interest. Right? It’s not like, Hey, I just own shares of GM.

00:20:37:14 – 00:20:39:11
Kyle Pearce
Yeah. Publicly traded company.

00:20:39:16 – 00:20:56:07
Jon Orr
If I die and they pass to my estate, would you do that? Just keep rolling. GM doesn’t care. But I mean, we care because like you said, we are operators and not only just shareholders of the company, so we get votes and how the company runs, we get sales. All of a sudden you didn’t sign up for that.

00:20:56:07 – 00:21:19:22
Jon Orr
So it’s now it’s like, how do we fund and force? We write in that we’re going to force that sale back to the corporation. And that’s the other thing. It’s like you have to decide to what format do you want? Does the corporation buy the shares from the estate? Or so the corporation is buying back ownership, which automatically distributes the equity to the existing partners?

00:21:19:23 – 00:21:40:19
Jon Orr
Or do you set up a format that says there’s a cross purchase where you have to decide who gets first choice or rights to buy shares, and you could potentially have you if you had a third partner. If we had a third partner and you and the other partner go, you know what? I’m going to buy 75% of John shares and you can buy 25% of John’s shares.

00:21:40:19 – 00:21:58:23
Jon Orr
Are you okay with that? All of a sudden there’s a negotiation and then all of a sudden you have way more controlling interest than equal shares. That has to be negotiated. So it’s like you have to decide what that looks like, let alone how to fund it That’s related to that. So it’s like, well, if we go, the corporation buys the shares out.

00:21:58:23 – 00:22:18:12
Jon Orr
So like an entity purchases the entity, purchase the shares back to the estate so that we’re buying back and automatically distributes that equity to the existing shareholders where are you going to get that money? You may be operating with high profit margin so that you hey, it’s a no brainer, but maybe this year it doesn’t work out like that.

00:22:18:12 – 00:22:35:02
Jon Orr
Oh, maybe next year it’s like we’re running at a deficit, but we want to still make the business rolling and we can’t buy them out. So if we can’t buy them out, what happens Now? We’re in a pickle. So now I know that this was your brain, baby, to figure out how you like. I think what most people do is they buy life insurance.

00:22:35:02 – 00:22:40:09
Jon Orr
But I know that you were thinking about, like, how do we set that up, right, to make sure that it does the right thing?

00:22:40:12 – 00:23:09:22
Kyle Pearce
Yeah, absolutely. And that is one thing. So not only if we go all the way to the front of the episode. So not only are there a lot of business owners that have shares in a privately held corporation, so they own shares in their corporation, maybe their spouse does as well. This might not be as big of an issue if, let’s say, a spouse were to pass, right, Because then you could have it written in that, hey, it just without any sort of transfer of money or wealth, the spouse takes the other shares and everything’s good.

00:23:09:22 – 00:23:31:09
Kyle Pearce
But as soon as you get outside of that world, you now have to start thinking about, like you said, this funding problem. And that’s where life insurance is definitely the easiest way to do that. And I would say the easiest way to do it quickly would be term life insurance. Now, some people are like, wait a second, Kyle has only talked about on any episode.

00:23:31:11 – 00:24:00:03
Kyle Pearce
He’s only talked about whole life insurance, participating whole life insurance, high cash value, all of those thing. That tool is an amazing tool, but it’s not necessarily the tool that is going to help us solve this particular problem. This particular problem can be solved with term life insurance. Now, the difference between the two is term life insurance is kind of like you’re renting an insurance policy, participating whole life insurance is like you’re buying it, right?

00:24:00:03 – 00:24:27:21
Kyle Pearce
So think about it as renting your home. You don’t have any equity in your home. You can’t go and get a lock on your rental. You are renting the home. And as soon as you stop paying rent, you got to leave, you know, have that roof over your head. Whereas like participating whole life is buying a home. You are invest ding in this home, you are actually building an asset, You are benefiting from compound interest and therefore you can borrow against it.

00:24:27:21 – 00:24:51:07
Kyle Pearce
So for this particular scenario, we’re going to talk about term life insurance. Typically different companies have different things. So for example, RBC, for example, I believe has like you can set the term to any number 11 years if you want. Other companies kind of stick to like ten years, 20 years. Some even have t100 you can have term for the rest of time, but the amount will change over time.

00:24:51:07 – 00:25:22:11
Kyle Pearce
Kind of like picture if you were in a rental and then every year the landlord tenant board allows you to increase the rent by a certain percentage. So there’s all kinds of different ways, but typically like a term ten or a term 20 will work. And you can of course cancel any time. You’re saying term ten. What they’re doing is guaranteeing you for ten years that they will cover you for up to a certain amount of money for ten whole years, as long as you pay monthly or annually, whichever you prefer a certain amount.

00:25:22:11 – 00:25:45:06
Kyle Pearce
So for ten years they’re guaranteeing the coverage regardless of your health situation based on what your health is today. They don’t care if it changes over time. They’re not going to charge you anymore. But beyond ten years, you can continue kind of like a one year lease on your home. You can continue that lease, but over time, the rate might continue to increase after that point.

00:25:45:06 – 00:26:09:02
Kyle Pearce
Right. So that is one way that you can do it. You and I, John, in this particular corporation, Matt and I also with our real estate corporation, we have term insurance over there. We both have that set up. But in our corporation, you and I have I think it’s around 2 million in term insurance in order to cover one of our deaths.

00:26:09:02 – 00:26:33:13
Kyle Pearce
So if one of us die, 2 million will go to the company. And from there we now have the funds to buy out the other family so that we could buyback the shares to the company. That’s the simplest way to deal with the death of a shareholder, right, If you want to make that easy, because then it’s like, wait a second, we got a formula.

00:26:33:15 – 00:26:54:20
Kyle Pearce
So we know and your formula is going to depend on your industry. So if your software as a service, software as a service is going to have a much higher multiplier because it doesn’t require as many people, right? So it’s very scalable, that’s going to have a higher multiple than, say, a service business like you and I are mostly in a service business, so that multiple is much lower.

00:26:54:22 – 00:27:19:12
Kyle Pearce
You get to decide that with your partner, but what you want to make sure is that you have at least enough insurance to cover that. It’s also not a bad idea to go. Are we anticipating to grow beyond a certain valuation and you might want to continue tacking it on. Now, one thing with our insurance policies that we tend to do is we also tend to make these policies convertible.

00:27:19:14 – 00:27:44:02
Kyle Pearce
And John, if we know what we want to convert it from, we’re renting insurance over here to take care of the buy sell over time. We might choose that if we have enough retained earnings in our company to buy the house and convert it over to a whole life policy which will allow us to put our money into the policy, allow it to grow and compound.

00:27:44:02 – 00:28:08:02
Kyle Pearce
We can borrow against it to buy other assets, which is the main tool and main reason we do this. But then there’s also this other magic benefit that we get inside our corporation. If we go back to either it doesn’t matter if it’s term or whole life insurance insurance in general, if one of us passes and that money goes, I think it was I said 2 million.

00:28:08:02 – 00:28:39:09
Kyle Pearce
So that 2 million goes to the company. It’s $2 million with no tax implication and we get to then use that money to buy back those shares without any tax implication. So there’s a magic benefit there. And then over time, if we slowly convert our term to whole life insurance, it’s like now we get this big, big, big asset and it becomes essentially a wealth or legacy plan for our estates.

00:28:39:11 – 00:29:12:07
Kyle Pearce
If we make it ten, 20 years without dying, then we could be building this other nest egg over here. Don’t worry about this part yet. Just make sure your term insurance is convertible. And of course, I have my favorite companies to have the convertible insurance that we want to be converting into. So imagine if you were renting a car over here and it’s like you can convert it into a car you owned, but the car was like a Pinto or it was a Corvette convertible, right?

00:29:12:08 – 00:29:38:16
Kyle Pearce
It’s like we want to make sure that what we design over here is a nice gateway that it maximizes your opportunity to protect in the short term, which is what we’re after here. But then also opens the door to that convertible Corvette instead of the convertible Pinto Right. Because that can happen if you go with certain companies that don’t have the products that are going to help you achieve the longer term goal as well.

00:29:38:18 – 00:30:07:17
Jon Orr
Yeah, that’s a good point for sure. And I think we try to outline here, I think that’s a great benefit of the service that we have been coaching our clients on and helping them kind of wrap their minds around like how are they using the buy sell agreements? Are we fixing these gaps that we’ve outlined here in this episode so that they’re filled in and then also going like, Hey, do we have the tools available or do you have the tools available to achieve the things that you want to see happen in the buy a sale agreement?

00:30:07:19 – 00:30:37:21
Jon Orr
We’ve been meeting with our clients on a regular basis. That’s why we got to address this, because it’s really important aspect of your corporation to set it up so that it’s tax optimized, but also so that you’re optimized in case one of these situations comes out. If you are looking to learn more about exploring how to set this up, but also how to structure your financial side of things, let’s say you want to get life insurance slid into the right spot to cover some of these gaps.

00:30:37:23 – 00:30:48:12
Jon Orr
Then you could head on over to invest in teacher decomp, work slash discover. We’d be glad to hop on a call and talk you through that or help you kind of navigate around that.

00:30:48:14 – 00:31:15:14
Kyle Pearce
And just to mention again and reiterate, it’s like I’ve never had someone reach out to me specifically asking for assistance with buy sell agreements. This usually comes out when they want to do something much bigger, much more elaborate. For example, they’re paying a lot in taxes. On the personal side, we’ve got people that own corporations and they’re like, Well, I thought I had to take a dividend because of this, or I thought I had to take a salary because of that.

00:31:15:14 – 00:31:41:05
Kyle Pearce
And oftentimes people are being I don’t want to say misled, but they’re not being well-informed enough to know the implications of why doing what they’re doing is causing, say, a certain amount of tax implications. So we get on these calls, but we often get stuck at places like this because it’s so much more important to make sure that these are in place and it’s easy enough.

00:31:41:07 – 00:32:02:10
Kyle Pearce
And I just want to reiterate, we don’t do the buy sell agreement for you. We just help ask you the questions that you want to go and talk to your lawyer about because your lawyer doesn’t know enough about your business like you do. Right. And that’s really the difference here. It’s not that you go in and you tell your lawyer, Why didn’t you do this in the first place?

00:32:02:10 – 00:32:27:15
Kyle Pearce
It’s like, well, if they don’t know exactly what you’re after, they’re not exactly sure in all cases and what to do. So once again, this is not intended to be something where it makes you question your team or anything like that. But it’s about being specific because until we’re specific and we know exactly what we want, we’re not necessarily going to get that clear focused approach that we’re after.

00:32:27:15 – 00:32:50:08
Kyle Pearce
So hopefully you found this episode helpful. Like John said, more than happy to hop on a call with you to discuss, buy, sell agreements. From there, I’m going to guess that there’s probably some other tidbits that you’ll learn along the way as well. That’s our goal, is to make sure you get at least one big takeaway from every episode, but also every phone call we get on that is very specific to your situation.

00:32:50:08 – 00:33:07:22
Kyle Pearce
So reach out to us over at Canadian Wealth Secrets dot com forward slash discovery and you can grab a spot so we can have a chat, learn more about you, your company, your businesses, whatever it is that you might be doing. And we’ll do our best to try to guide you to the next best step.

00:33:07:24 – 00:33:27:00
Jon Orr
Folks, we want to thank you for listening to this episode of the Invest in Teacher podcast. If you have not yet subscribed to that subscribe button on wherever your listening is that Spotify is that Apple podcast. I’m personally been listening on Spotify for the last couple of years and I don’t even know what the other platform was like anymore.

00:33:27:00 – 00:33:37:17
Jon Orr
I’m all on Spotify. Don’t forget also, we’re on all social media app. Invest in teacher YouTube, Twitter, Instagram, Facebook, all those things. So make sure you follow us and learn more.

00:33:37:19 – 00:33:53:16
Kyle Pearce
Links, resources, transcripts and all kinds of other goodies can be found over on the website at Canadian Wealth Secrets dot com forward slash Episode 51 that is Canadian Wealth Secrets dot com forward slash Episode five one All right.

00:33:53:16 – 00:34:21:19
Jon Orr
Investor Students Class dismissed. Just as a reminder, the content you heard here today is for informational purposes only, you should not construe any such information or other material as legal tax, investment, financial or other advice.

00:34:21:21 – 00:34:57:12
Kyle Pearce
Matt Begley is a licensed realtor in the province of Ontario with Deer Brook Realty. John is a mortgage agent with Brick’s mortgage license number. m23006803. And Kyle Pierce is a licensed life and accident and sickness insurance agent and wealth architect with the Pan Corp. team. And that team includes all those from corporate advisors and the PAN financial team starting.

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