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Money Matters: Consider Rushing Back your Buy/Sell Agreement in Owning Business

By
Real Estate Agent with RE/MAX

You and the owners determined that you really did not want anyone engaged in the business if one of you passed away, so you carried out a buy/sell or stock cross purchase agreement.

 

Everything is still going great, so you have nothing to worry about right? However the answer is a big NO! Business owners often find concerns with their buy/sell agreements only after one of the owners has succumbed or another life event happened.

 

A right executed agreement can provide the deceased’s family a just price for the stock they inherit and be sure that they are available from the worries of handling a business.

 

It is crucial that business owners assess on a regular basis the worth of their business and amplify the buy/sell agreement funding source if needed. This can usually be done through the purchase of either a new insurance policy or restructure of existing policies.

 

Another life event that can take place, which might not have been addressed in the original buy/sell agreement, is the disability of an owner particularly because the probability of a long-term disability prior to age 65 is higher than the probability of death.

 

Owners can offer funding for this kind of scenario by owning disability insurance policies on each other. The policies can supply the cash flow stream to fund a buy-out if necessary. This can also be an agreement where the company owns the disability policy on the owners and would purchase back the stock from disabled owner, making the other owner as the only stock holders.

 

There are elements to consider when making this type of agreement. Some are: how is disability defined, what is trigger date, funding period, what if someone recovers from a disability and the buyout has already begun and can policy be altered to an individual policy if the buyout need no longer exists.

 

Another thing to consider is: if there is an acceptable process in place to value the business and a way to fund the buy-out?

 

Conversation should happen between the owners pertaining to this concern in an effort to provide for an rightful transfer of the business interest, decide a mutually agreeable sales price and terms of the sale and also to supply some stability for the corporation and its customers.

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