Having a buy/sell agreement in place and funding it with life insurance is one of the best ways to assure business continuation. Additionally, this can provide financial security for the loved ones of a deceased business owner and helps to avoid the challenges of “being in business with my deceased business partner’s spouse.” Essentially, it puts both the agreement and the funding in place for “If I die, you buy. If you die, I buy.”
It is generally structured so that any surviving partners purchase the remainder of the business in the event of a partner’s death. The purchase is then funded by the death benefit of the buy/sell life insurance policy.
We specialize in all types of buy/sell insurance. The most common type today is life insurance, and there are many different types of life insurance which can be used to fund buy/sell agreements, each with unique features and benefits.
Buy/Sell Disability Insurance
Did you know that the average American is 3 times more likely to suffer from an extensive debilitating sickness or injury than they are to die before reaching age 65?
Disability buyout coverage insurance is frequently overlooked by business owners. As the number of owners at your company increases so does the likelihood of a disability for you or a partner. Many buy-sell agreements contain stipulations that force ownership to be sold from a chronically ill owner to the remaining healthy owners after a disability has occurred for 12 months. The non-disabled owners must often scramble to come up with enough cash to complete the transaction in time. Therefore, those in the know use disability buyout coverage proceeds to raise cash in the event of just this type of emergency. When discussing buy-sell coverage, it’s important to keep in mind the financial risk a disability brings to your organization. It’s imperative to plan and protect against the possible disability of owners, just as you would with premature death.
If something were to happen to an owner of your business, what would happen to the business? Who would purchase the company or the deceased partner’s or shareholder’s interest, and who would run the business? What is a fair price and, if there is urgency in making a sale, would it be sold at that fair price or a distressed value? What would happen to the deceased owner’s, partner’s or shareholder’s loved ones? These are very real and pressing questions, and every small- to medium-sized business should have a plan to answer them.
Having as much continuity as possible when an owner dies is critical. What would the impact be if a solid plan and funding are not available? Suppliers and lenders may get nervous; perhaps key employees may consider the deceased’s death as a reason to move elsewhere. A buy/sell agreement is important and can help to mitigate many such issues.
Funding a Buy/Sell Agreement
Death is inevitable, but when it is unexpected it can have a very significant financial impact. A buy/sell agreement is essentially the last will and testament for the business, which therefore eliminates many difficulties and heartaches when an owner dies. A plan needs to be in place, and a method of funding said plan must be available.
There are several options for funding a buy-sell agreement:
The “wait and see” method – where no provisions are made. This often means surviving owners wind up with the extra burden of picking up the workload of a deceased partner. They may find themselves in business with the deceased’s spouse. They may want to “do the right thing” and continue the pay of the deceased owner. How long could that go on? This represents a significant gamble for the loved ones of the deceased.
Use personal funds to buy-out the deceased’s equity: What if it comes at a bad time and the payments just can’t be made? Where does that leave everyone?
Borrowing: Borrowing funds is not an option to the deceased. Could you put together the money to purchase the company? Can the surviving partners borrow enough to purchase the assets of the deceased partner? In today’s market, a significant business disruption like the loss of a key employee or owner is likely to make banks extremely nervous and unwilling to lend.
Set up a savings program: A savings program could be established in anticipation of an unexpected event happening, but what if something happens before enough money is set aside? If times get tough will the money still be able to be set aside?
Life insurance: This provides an infusion of capital at precisely the time when it is needed and some policies offer cash accumulation providing real-time liquidity to your business.
Contact us for more information on funding buy/sell agreements with life insurance.