A solid buy-sell agreement can reduce conflict and memorialize how ownership interests will be distributed upon death, providing liquidity for both business, heirs and families of deceased owners.
Life insurance can be one of the most reliable funding vehicles for a buy-sell plan, whether purchased directly by the business or indirectly via trusts and limited liability companies for more flexibility.
Life Insurance
A buy-sell plan can help minimize financial instability and conflicts when an owner leaves or passes away, helping ensure continuity for your company after each stake sale occurs. One effective method of funding this type of buy-sell agreement is via life insurance policies – helping ensure a deceased or departing stake is acquired at an agreed upon price and continuity amongst remaining business partners or sole proprietorship owners. Partnerships, corporations and sole proprietorships all benefit from this type of funding mechanism.
Start by determining the value of your business, then create a buy-sell agreement based on either an entity purchase agreement or cross-purchase agreement. Under an entity purchase agreement, life insurance policies on all ownership shares are purchased – their death benefits being used to buy out shares in case of death, disability, or exit; traditional term or permanent policies can be utilized here.
Under a cross-purchase agreement, each owner’s share is insured by the business and all are named beneficiaries. Should an exit, disability or death occur during that period, all owners can use their individual life policies to purchase out the business at an agreed-upon price.
Both of these methods can provide peace of mind to both the family of a deceased business owner as well as remaining business owners, but each approach comes with its own set of complexities that must be carefully evaluated for every business and owner individually.
Life insurance policies must be paid on a regular basis or they could lapse. Therefore, it is crucial that a system be put in place to track and monitor premium payments as well as annually reviewing coverage to make sure that it still meets business needs; otherwise alternative funding methods must be explored.
Disability Insurance
Disability can have devastating repercussions for business owners and their family and personal lives alike, as it impacts not only themselves but their colleagues, employees and customers. Disability insurance provides financial security should an illness or injury prevent someone from being able to continue working; thus why many buy-sell plans contain disability components.
This type of plan allows remaining partners/owners of a company to purchase the share of an infirm partner through disability buy-out policy which typically pays out either as a lump sum or monthly benefit after meeting an elimination period threshold.
Some buy-sell policies also offer key person disability policies, providing coverage for expenses like rent, utilities, payroll, equipment leases, employee benefits and advertising costs should one of your client’s most valuable employees become incapable of performing his or her job duties. This policy helps ensure their financial interests are secure when one of their most valued workers becomes incapable of fulfilling his or her role.
Buy-sell insurance is often thought of as a method for passing down ownership upon death; however, disability cover can also provide crucial protections to protect families, lifestyles and companies they love to work for. A buy-sell agreement that includes disability coverage could save your clients’ assets as they adjust to life after permanent disability.
As part of their exit planning efforts, when working with small business clients on exit strategies it’s essential that they include both buy-sell disability insurance and life insurance as components of their exit strategies. By taking this precautionary measure your clients can ensure their businesses are ready for any unanticipated circumstances that might arise and have peace of mind knowing they have taken steps towards planning for the future – rather than having to rely on personal savings or loans which could put the company at risk; buy-sell insurance can prevent this risk while at the same time saving a business relationship when needed most.
Business Owners Policy (BOP)
A business owner’s policy (BOP) is an insurance package designed for small businesses. This covers general liability and commercial property policies while potentially also including accounts receivable or business interruption coverage. BOPs tend to be less costly than purchasing each policy separately.
A BOP provides your business with protection from unexpected events that may arise while operating it, from damage to your buildings and furnishings to lawsuits from customers who become injured on your premises. A BOP covers all assets used to run it such as computers, furniture and inventory in your office; in some instances it even may cover costs to replace records.
BOPs provide financial protection from theft, fire or natural disaster. Many commercial lease agreements require them; BOPs can also be an excellent solution for businesses operating out of leased or owned offices, stores or garages.
Your business’ needs may necessitate additional coverage beyond a BOP policy. For instance, adding accounts receivable insurance could cover outstanding customer payments that were lost due to natural disaster or data breach; you can also purchase separate liquor liability and employment practices liability policies as needed.
An entity purchase, or stock redemption plan is another effective means of funding a buy-sell agreement. Under such an arrangement, the business purchases life insurance policies on each employee-owner, then uses any proceeds from these policies when an owner passes away to buy their share in the business – giving liquidity for remaining owners who wish to buy out deceased owner interests and continue operating with less volatility.
A buy-sell agreement provides stability to closely held businesses by preventing third parties from purchasing your ownership interest in your company and guaranteeing that any deceased owner’s estate receives fair value for their share in your firm. In addition, these contracts help prevent conflict and litigation following key employee deaths in your organization.
Business Exit Planning
An exit plan is an essential element of running any successful business. It enables owners to understand their personal and financial goals, and how these may be accomplished through the sale of their company, while setting realistic expectations of themselves and professionals, so they are prepared to negotiate the best price. A good exit strategy includes creating an accurate account of business value; planning for succession management; and making provisions for transfer of ownership interests should triggering events arise.
Funding buy-out clauses in a plan can be accomplished using various means, depending on the specific needs of both the company and its owners. Life insurance may be ideal because it provides instantaneous liquidity if there is an unforeseen triggering event without needing additional financing from either side; other options could also exist depending on your business’ nature and deal size – using working capital, borrowing from third parties or creating a sinking fund may be effective solutions.
At least three to five years before your expected date of retirement, it is wise to initiate business exit planning. A calculation of business value should be the initial step and should be regularly updated as circumstances evolve. A proper valuation should account for both tangible and intangible assets within your company as well as marketability to potential buyers.
Your team may include a financial advisor as well as professionals such as a commercial banker, business broker, investment banker, family business advisor, specialist legal professional or valuation expert depending on the exit option you select; all should have experience working within your industry and with your business itself to help maximize returns when the time comes to sell it off. Having such professionals in place will help make sure that when selling is time comes around you get maximum value out of selling off your company.
