Frequently asked questions from business owners

Factor the value of your business into planning conversations. Because this value can change over time, review it every few years, and/or when a major event or change occurs.

Principal offers complimentary informal business valuation services. This informal business valuation isn’t meant to take the place of a certified valuation, but provides a base value to begin the overall planning conversation with your financial professional. The focus of the informal valuation will be on the current financial performance of your business.

You can work with your financial professional to request this informal business valuation. It’s easy to do. Complete a short questionnaire and provide three years of your most recent business financials (i.e., three most recent years of company tax returns, or profit and loss statements and balance sheets), a copy of your buy-sell agreement, and any amendments.

Then, we’ll work with your financial professional to provide the informal business valuation report within five business days. The Buy-Sell Review report will be provided within 15 business days. If you don’t have a financial professional, we can connect you with one.

How you plan to transfer ownership of your company is part of an overall plan to protect its value. Establish a formal buy-sell agreement now, so that if you or another owner decides to transition out for any reason, there’s a smooth place for both the selling and remaining business owners to land.

Fully fund the agreement. That means you have a plan for how and when available funds will be used in this transaction to protect yourself from negative financial impacts. Life insurance and disability buy-out insurance can help with this type of funding, among other funding vehicles such as loans, sinking funds or cash.

It’s smart to plan to protect the integrity, cash flow, and ongoing success of your business despite losing a key employee—including yourself.

• Whether due to death, disability, or termination of employment, key person life and Key Person Replacement disability insurance can help with expenses associated with recruiting and training a replacement.
• Term life insurance can provide financial support if a key employee dies.
• Consider funding key person protection with permanent life insurance to help address expenses, if a select employee leaves the business.
• Key Person Replacement disability insurance can help the business recover financially if you or your top talent become too sick or hurt to work.

The stronger your benefits program, the easier it is to attract top employees. Offer cash bonuses, additional time off, employee stock purchase programs, or nonqualified plans—such as deferred compensation, split dollar, and bonus plans. If you have a select employee whose earnings and contributions to qualified retirement plans are limited by law, these plans can provide additional benefits and perks. The result? More engaged and loyal employees. They’re a great recruiting tool, too.

Group benefits are a great perk you can offer to all eligible employees. But providing a benefits package that works for your employees—and your budget—can be a challenge. No matter the size of your employee base, there are options you can choose to make sure you get the products and services you need. Group dental, disability, life, vision, critical illness, and accident solutions are highly customizable to fit your needs. When it comes to cost, you can choose to pay all, part, or none of your employees’ benefits.

A qualified retirement plan is a proven way to attract good employees. You can choose from defined contribution and defined benefit retirement plans.

Some of your retirement plan options:

401(k) profit sharing plans
Allow employees to defer salary, and allow you to contribute matching contributions and/or provide discretionary contributions.

Simplified Employee Pension (SEP) plans
Allow employers to make federally tax-deductible contributions directly to Individual Retirement Accounts (IRAs) established by eligible, participating employees. Unlike regular IRAs, contributions aren't limited to $6,000, but can be as high as 25% of compensation or $58,000, whichever is less (2021).

SIMPLE (Savings Incentive Match Plan for Employees) IRAs
Allow employees to save for retirement by deferring salary on a pre-tax basis and receiving predetermined company contributions. Compared to other types of retirement programs, the SIMPLE IRA is relatively easy and inexpensive to administer, without cumbersome plan testing or governmental reporting requirements.

Defined benefit plans
Define the benefit that will be provided to each employee, generally as a percentage of monthly or annual compensation. These plans are funded only with employer contributions. No salary deferral contributions are allowed.

Cash balance plans
A hybrid plan where the benefit is communicated as a dollar amount in today’s dollars and the annuity calculations are done at the time an employee qualifies for the benefit.

Employee Stock Ownership Plans (ESOPs)
ESOPs are qualified plans similar to profit sharing plans but they’re funded primarily with employer stock.

Your top-paid people may be losing benefits due to government restrictions on qualified retirement plans. These additional benefit plans can help restore lost benefits or give them an added perk for being so valuable. These benefits are also a way to recruit, reward, retain, and retire top talent.

Some examples include:

Bonus plans
You contribute to the plan for select key employees; the financial product (usually permanent life insurance) that funds the plan can provide retirement income, death benefit protection, as well as additional living benefits.

Deferred compensation plans
Designed for highly compensated employees, these plans are employer-sponsored benefits that address retirement and other savings needs. Using either a defined contribution or defined benefit plan design approach, deferred comp plans offer pre-tax deferral of participant compensation or employer contributions depending on plan type and plan design.

Split dollar plans
These plans can reward select employees by helping them enhance their retirement income or meet other financial security goals. It can also provide survivor benefits for their families. And, this plan design offers options for recovering your costs for this benefit.

Disability income insurance can help provide income to your top talent while they’re unable to work. Many employers offer group long-term disability insurance to their employees. That’s a great foundation for income protection. But it may not be enough for everyone—especially high-income earners. Offering both individual disability income insurance and group disability coverage gives key employees even more income protection. That extra protection can help you attract and retain quality employees.

Your business has been an important source of financial support. Make a plan for how it can continue to provide for you and your family as you slow down or completely step away from it.

Principal offers three complimentary proposals:

• Business Owner Retirement Analysis shows if you’re on track to meet your retirement income goals (PDF).
• Family Business Planning proposal, for privately held businesses, helps you plan for your own personal financial future (PDF), and for the next generation’s ownership.
• Agribusiness Solutions proposal helps you transfer your agribusiness (PDF) (farm/ranch) to the next generation while ensuring your personal financial future.

Each of these comprehensive proposals will consider the value of your business, and any personal savings and transition plans you have in place. It will provide feedback on how financially prepared you might be to transition away from your business. These reports will identify gaps or challenges you face and provide recommended solutions. The Family Business Planning and Agribusiness Solutions proposals will also address your estate and legacy planning needs.

Disability insurance protects your income against life’s uncertainties so you can avoid dipping into savings or retirement assets when you’re too sick or hurt to work. Individual disability income insurance can help replace a portion of your income if you experience a prolonged illness or injury.

You’re wise to think about estate planning. A proper plan helps make sure your assets—both personal and business—meet your lifetime objectives and will be distributed as you want. Properly drafted estate documents could also protect your heirs from probate court and potentially decrease estate taxes.

Ask your financial professional to review your estate planning documents. Then you can work with your local attorney to discuss which ‘best practices’ are most relevant for you, to ensure your legacy goals are met.

A thoughtful plan can help you feel comfortable that your family or heirs maintain their standard of living before and after your serious illness or death. Your plan may include a will and trusts. Life insurance is commonly used to provide liquidity to help ensure your beneficiaries/heirs can pay final expenses, pay off liabilities, and replace any lost income. You can choose from many types of life insurance to fit your specific needs and budget. Certain types of policies not only provide a benefit at death, but during your lifetime, in the form of access to cash values or even the death benefit itself, if you’re diagnosed with a chronic illness.