I wrote this for some commercial clients I worked witha number of years ago. They were looking at SBA fianing and wantd to know about a Buy-Sell Agreement and life insurance.
Happy reading...
Many businesses are great at what they do. They provide great client service and have excellent products. They have plans in place to protect their clients ands have insurance to protect their equipment. They often forget to protect one other very important asset, their business.
Business owners should develop a succession plan when they open their business. Without a succession plan there is no plan in place if something happens to you or a partner. Your heirs could have a business that they can't sell or you could have partners that you did not bargain for.
A succession plan includes a buy-sell agreement that will protect your partner and your beneficiaries. It also ensures a smooth transition of ownership. It is like a will for your business. A buy-sell agreement allows business owners to determine the terms and conditions for the future sale of the business. It guarantees a buyer and sets a pricing method for the departed owner's interest in the business. This ensures the heirs of the departed owner recover that interest in the business and enables the surviving partner to retain control of the business.
Types of Agreements
The two most common types of buy-sell agreements are a cross purchase agreement and a stock redemption plan. Under a cross purchase plan the remaining business partners agree to buy out the departing owner's share of the business. In a stock redemption plan, the business itself agrees to buy the shares of the departed owner.
Funding the Agreement
The most common options for the funding of a buy-sell agreement are disability and life insurance. When a small business loses a partner, the business usually falters a bit. Unlike a large corporation with many employees and bosses that are easy to replace, a small business with two partners that have worked together for years will find it more difficult to replace the departed partner. At this time the business is usually strapped for cash and buying out the departed partner may cause irreparable harm to the remaining partner. The effects of the loss of a partner would also be emotionally hard on the remaining partner, since they have worked together over a long period of time. An insurance policy could provide the cash for the buy out immediately without causing problems for the business. The partners could have the premiums paid by the business until they need the proceeds.
Life and disability insurance cost will vary based on age, health and the amount of coverage required. The type of business you own and the services you perform may be a factor as well. Before using insurance as part of a buy-sell agreement you should contact your attorney and financial advisor.
Brian Ginty of Independent Fiancial Services provided me with a lot of insight for this article. His web site is http://www.independentfs.com/.
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