Buy/Sell Agreements for Business Owners
by karls | October 1, 2008
Have you ever wondered what would happen to your business if one of your owner partners dies? For example, say you are 50% owner of a business and you have 2 partners with 25% interests. If something happens to one of those owners with a 25% interest who will you in business with? If you haven’t done any planning the answer is you will be in business with your deceased business partner’s spouse or children. It can be a very uncomfortable situation.
Your new associates will not have the history with the company your former associate had and will most likely want one thing. CASH. Since your valued partner is no longer there to produce for the company the new non-producing partner’s demand for income from a company which they partially own can be particularly difficult.
Fortunately there is an easy solution – life insurance. You, or your business, can buy life insurance on each of the owners in an amount equal to the value of their portion of the business. If one of the partners dies, cash will be available to buy out the deceased partners interest. You won’t have to worry about being in business with your partners beneficiaries. Your business partner will be pleased that their beneficiaries get needed CASH should they die.
Your companies life insurance solution should be accompanied by a legal document called a “Buy/Sell Agreement”. A Buy and Sell Agreement is a legal document that binds the deceased owner of the company interest to sell at the agreed upon price and for the present owners to buy the interest at that price. It’s a simple, elegant way to assure harmony in the business if one of the owners should die. An attorney specializing in estate and business planning will be able to help draft the document.
One of my partners and I were just considering this very problem. We have another partner who has increasingly ailing health, and we weren’t sure what would happen if anything happened to him, or us for that matter. We all have wanted to ensure the continued survival of our business. I never realized that there were life insurance options for businesses, and not just for individuals. I’ll need to go see an estate attorney soon to figure this out.
Thanks Efinancial
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Anthony, I’m glad you found this useful. I was in a similar situation several years ago and my partners and I decided to invest in this form of insurance. Fortunately, none of us have passed on (and, knock on wood, won’t for quite some time) but this type of insurance is invaluable for the peace of mind it gives us all: knowing that in the event of something unfortunate, our business will continue to prosper and our families will be well taken care of. Every business should invest in something like this; you won’t regret it.
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I wholeheartedly agree with this idea. I have started several companies over the years, and for most of them, we used this type of agreement or something very similar. It provides fantastic piece of mind, and ensures that there is stability in the company should anything happen. It is always an awkward conversation when first mentioned, but if all parties understand it correctly, there should be a quick consensus that a life insurance policy of some kind is the most responsible course of action.
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Any small business that has partners, simply MUST make the investment in a Buy-Sell agreement. To not have one is openly courting with disaster, especially if the partnership is 50-50. Woring for an Insurance broker, We have seen too many of these situations occur, whereas, the partnerships that have a buy-sell in place continue to thrive after disaster strikes.
Jean Drogus
http://www.securefloridian.com
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