If you are a small business owner you will want to find out as much as you can about buy sell agreements, especially if you have partners with interest in your business. A buy sell agreement simply ensures that if a business owner passes away, his or her heirs and family relations will receive full value for the business and any business partners or shareholders living can carry on the business without interference from the deceased partners family and relations.
Let’s imagine a situation where 2 friends, we will call them Raf and Tom, start a small mattress business. In a few years they have grown the business to several locations and the business is now worth 10 million dollars. If one partner, Raf for example, passes away, what happens to the ownership structure of the business? Does Tom now simply carry on as the sole owner of the business? What if Raf had a wife and a young son, or a father who he would have liked to be paid out on the value of his share of the business? How does Raf fund this?
Raf could create an agreement that requires Tom to pay out his wife or his father the agreed value of the business. But what if the company does not have enough liquid assets to pay off Raf’s share to his wife or family? Tom would then have to borrow funds, use personal assets, or pay in instalments over time, probably out of the small company’s profits…possibly straining the business operations financially. If Raf was the brains behind the operation, the company may never recover.
So how does a life insurance funded buy sell fix the problem? Almost all buy sell agreements include a guaranteed purchaser, which in almost every case is the surviving business partner. There is a guaranteed sale. Which means the deceased partner’s family must sell his or her ownership interest in the business. There is always a guaranteed purchase price. This means that the two business owners agree on a price or at least a method which executors can use to determine what each partners interest in the business is worth. Business values change over time so setting a pricing formula is the more practical way of determining the worth of the business on the death of a business partner. The final and perhaps most advantageous reason to use a buy sell agreement funded by a life insurance policy is guaranteed funding.
In the case of Raf and Tom, both partners would be insured upfront for for an amount consistent with their ownership interests in the mattress company. On Raf’s death, the buy sell would be triggered and a lump sum payout to Raf’s family would terminate his sides interest in the mattress company. Tom would not need to use personal assets, pay instalments or borrow money to pay out the family, nor will Tom have to deal with any influence from Raf’s family over the business operations. If Raf was the “brains” behind the business, Tom would have the needed finances to seek a new “key man” to keep the business going. Everyone wins.
Long story short, when 2 or more business partners agree to a buy sell agreement funded by life insurance, they provide each other with guarantees that both sides’ family and heirs will be fairly protected in the event of a loss. Without the guaranteed funding of life insurance, the deceased owners’ family must rely on the success of the business and the good will of the surviving partner.
If you are a small business owner you can avoid many of these issues by fully funding a buy sell agreement with life insurance today. Reach out to me and I will guide you through the process.