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Guest Post: Buy-Sell Agreements
If you are a partner or a shareholder in a family or small business, you would want your business to flourish even after you are gone. Yet, statistics reveal that only 30% of family businesses survive after shareholders pass on. This makes it all the more pertinent for you to have a business succession plan in place, so that your business is protected from financial mismanagement, a buy-out or even bankruptcy after you die. A key tool in your business succession plan is a buy-sell agreement.
What are buy-sell agreements?
A buy-sell agreement is an agreement between business partners to buy out the share of a deceased partner. A buy-sell agreement is uncomplicated and economical; it removes all the problems associated with buying another partner’s interest in the business – the question of whether the business can fund a buyout, and if it can replace the job of the deceased partner. Life insurance is an important tool in the execution of business succession plans. How does it work? It is very simple – after determining the value of the business, life insurance is purchased based on each partner’s share. This allows a no-hassle transfer of interest in the event of a partner’s death.
Types of life insurance-funded buy-sell agreements
There are two types of buy-sell agreements, Cross Purchase and Stock Redemption. In a Cross Purchase each owner buys a life insurance policy on the other owners, and is named the beneficiary of such a policy. In a Stock Redemption situation the business purchases the life insurance policies. When a partner or shareholder dies, the other partners use the proceeds of the policy to redeem the deceased partner’s share.
The process
Though buy-sell agreements can be drafted and executed by the partners themselves, it helps to take the help of an attorney, an accountant and a life insurance professional to guide you through the process and spot any loopholes in your succession plan. Make sure you work with professionals with either a CLU (Chartered Life Underwriter) or a CFC (Chartered Financial Consultant) designation. An attorney’s role is vital in drafting the agreement, the value of the firm, and in deciding the best alternative from the perspective of tax benefits.
These professionals will also help you choose the best kinds of life insurance policies for the execution of your buy-sell agreement. Free life insurance quotes are also available online.
Buy-sell agreement/policy review
Experts in buy-sell strategies recommend that the agreement should be reviewed periodically, preferably every alternate year. The value of your business will keep changing, and you need to make the corrections in your policy values accordingly.
In the event that the owners decide to wind up the business or sell it, it doesn’t take too much work to convert the life insurance policy into a personal life insurance policy.
Advantages and disadvantages of a buy-sell agreement
A buy-sell life insurance agreement lays to rest many of the succession-related uncertainties that business partners are faced with. The life insurance death benefit aids the partners/ the business to buyout the deceased partner’s share. The deceased partner’s family benefits from the proceeds of the sale, and the amount is tax-deferred. The proceeds are also exempt from corporate alternative minimum tax and creditor claims.
A qualified adviser will be able to help businesses iron out the few creases that buy-sell agreements have – life insurance premiums are not tax deductible, the premiums will vary as per the partners’ individual age and health conditions, etc.
Buy-sell agreements are vital to succession plans of small businesses
Even if the partners are in total agreement about future plans, a formal buy-sell agreement will set things in stone, and help ease the minds of all the parties concerned. A buy-sell agreement is vital to the smooth continuity of every small business, so get started on getting quotes online for your buy-sell plan today.
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what an excellent idea, it’s simple but effective. I was actually surprised by the stats of 30% but i suppose it makes sense. Customers are likely to come back to a business not only because of the service it provides but because of the personell working for it. If you lose the owner you lose a huge chunk of the business ethic itself
At the outset Buy-Sell Insurance seems trivial. But if you discuss with accountants and business professional who have been around the block for a couple of decades they will tell you several cases where the buy-sell insurance would have alleviated business setbacks. Just like all insurance protection it is worthless until you are ready to use it.
And look forward to reading more here, really interesting times. Thank you again for all the details.
Wow! so great and so excellent very knowledgeable.Thanks for creating this site.So nice information content.I think this well help a lot to me.I honestly enjoy most of the posts and your different point of view.Im so interesting of this.Thanks
SO important to understand the importance of buy-sell agreements!!! Thanks for the post.