Does your business have more than one owner or shareholder? Does it have an agreement in place that addresses what happens if death or disability strikes?
You and your co-owners have worked incredibly hard to build your business into the success it is today. Part of running a successful business is being proactive and prepared for the unexpected.
What would happen if your business partner died, became disabled or incapacitated? What if he or she gets divorced? Or files for bankruptcy? What is the impact on your business?
How will you fund the buy-out of your departing partner’s interest in the business? Could they purchase your share of the business if something happened to you?
There are numerous issues to consider when structuring a buy-sell agreement and advanced planning is essential. Assisting our clients with the funding solutions and product recommendations is a core area of expertise at Integrated Financial Strategies.
- A legally binding agreement between a business and its owners.
- Stipulates/governs what happens if a business owner dies or leaves the business for other reasons (e.g., disability, illness, early retirement, divorce, misconduct/incarceration).
- Establishes a formula or method for determining the fair market value of a business.
- Explains in detail the obligations of the remaining business owners for buying out the disabled/deceased business owner’s interest in the business.
- Ensures that the disabled owner/survivor of the deceased owner is promptly compensated for their interest in the business.
- Includes dispute and conflict resolution mechanisms.
- Does your business have a buy-sell agreement? Is it up to date? Has it been signed by all parties?
- When was the last time you reviewed the buy-sell provisions of your agreement? Are they up to date? Do they reflect the current fair market value of your business?
- How will the buy-sell provisions be funded?
- Do the buy-sell provisions of your agreement contain clauses that deal with the disability of a shareholder? How long must someone be disabled before it triggers a buy-out of their interest in the business? How will this be funded?
- Has there been a change in control of your business? If so, have the buy-sell provisions of your agreement been updated to reflect the change in control? How will they be funded?
Why insurance is the best way to fund a buy-sell agreement
Taking the time and thought to draft a buy-sell agreement is important. More importantly, for the buy-sell agreement to be effective, it is critical to have the funding that satisfies the terms of the agreement. The common methods for funding a buy-sell agreement are insurance, installment payments, using existing profits, and borrowing funds.
Whether it is life insurance to fund the buy-out of a deceased owner’s interest in the business or disability insurance to fund the buy-out of a disabled owner, insurance is by far the least expensive way to fund a buy-sell agreement.
The cost is the annual insurance premium, and the proceeds received by the business from a life or disability insurance policy are tax-free.
I have been working with Integrated Financial Strategies (IFS) since 2005 for my insurance portfolio planning. In late 2020, IFS worked with my legal & accounting advisors to develop and implement a comprehensive life insurance solution to provide liquidity for my estate to fund tax liabilities. The planning was thorough, efficient, and done in a professional manner. I am grateful to the IFS team for raising the issue and diligently assisting to execute the solution.