|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
Buy-Sell Agreements are Essential Business Planning Tools
Few business owners ever imagine being in business with their partner’s spouse or children, but that is the possible nightmare they face when they don’t have a proper, insurance-funded business transfer plan in place. Short of a funded business continuation plan, business partners or shareholders risk the dissolution of their company if they are unable to "buy out" the interests of a deceased partner’s family. For any business with multiple owners or partners, one of the most critical planning issues is preparing for business continuation in the event of one of the owner’s or partner’s death.
At the core of a business continuation plan is the buy-sell agreement, a legal document that dictates when, how and to whom the shares of a business will be legally transferred. For the buy-sell agreement to be effective, however, it must be funded, meaning, when death occurs, there must be capital in place to effectively buy-out the family or estate of the deceased partner. Life insurance has been the preferred method of funding agreements because, for a small investment, it can guarantee the funding of the agreed-upon purchase price at the time it’s needed.
Which Type of Buy-Sell Agreement to Use
The main questions for business owners revolve around which type of buy-sell agreement is appropriate and the type of life insurance arrangement that will most efficiently facilitate the business continuation plan.
For small businesses with multiple owners, two of the more commonly used agreements are:
Appropriate for smaller businesses with three or fewer owners generally used in partnerships.
To reduce the number of insurance policies in situations where there are multiple owners, a "trusteed" buy-sell agreement, administered by a professional trustee could be a viable alternative to a cross-purchase.
Stock-redemption (entity plan) agreement
Appropriate for business entities formed as a C Corp, S Corp, or LLC.
Business owners must recognize that a funded buy-sell agreement can be the most important document they’ll ever sign. However, they are complex legal documents and should be drafted by attorneys specializing in business transfer law. There are also tax implications that all the owners should consider with a qualified tax professional.
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