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BusinessHub

SWBC's BusinessHub blog is a one-stop resource for business owners and company decision makers.

 

Buy-Sell Agreements: Protecting the Future of Your Business


buy-sell-agreements-300What words pop into your head when you think of yourself as a business owner—decisive, responsible, a go-getter? Although all business owners are different, one common factor for most is that they stay busy. Busy with clients, busy with employees, and busy building a successful company. But, what happens when business owners are no longer around to make decisions and run the company that they spent all those years investing time and money into? Will the company fail? Will it continue to run smoothly?

If you're a business owner, there may be countless questions you ask yourself when you think about the future of your business. That is why it is important to plan for not only your families’ future but also the future of your company.

What is a Buy-Sell Agreement?

A buy-sell agreement can help you control and protect the future of your business. It allows you, as a business owner, to make decisions that will go into effect after you’re gone. A plan is agreed upon between you, the business owner, and the parties interested in purchasing your company should you pass. Like all agreements, a buy-sell agreement must be structured properly to insure its effectiveness.

There are a variety of ways to fund an agreement should it need to be activated due to your death; one of the most common ways is with a life insurance policy. The policy insures your life with the owner and beneficiary most often one of your partners or key employees who will assume the business upon your death. The amount of life insurance is tied to the value your business which will be purchased from your family or your estate. This agreement allows you to document the future plans of your business and brings with it peace of mind, knowing that your family and possible business partners do not spend money and time arguing about the future of your business.

What kind of businesses would benefit from a Buy-Sell Agreement?

Buy-sell agreements can protect your company whether you are a sole proprietor or in partnership with others.

As a sole proprietor, your business will be left to the executor of your estate. They can either choose to continue running the business or sell the business to an appropriate party (i.e. a business partner). Problems arise when inheritors do not agree on the future of your business. For example, one heir may want to hold the company, while another may want to sell their portion. In a case such as that one, a buy-sell agreement would allow a happy medium to be reached--allowing for the payout from  the sole proprietor's life insurance policy to compensate the party that would retain whole ownership of the organization. An appropriately laid out buy-sell agreement for this exact type of circumstance could offer the directive for the cash needed for this type of transaction.

But what if you are in a business partnership? Will a buy-sell agreement still benefit you? The short answer is yes. To ensure that a buy-sell agreement works in an ideal fashion in conjunction with a life insurance policy, each partner should purchase a policy on their business partner, naming the opposite person as their beneficiary. In the case that a partner passes, the life insurance policy payout--payable to the business partner--would fund the transaction to the deceased partner’s inheritors.

Like most decisions in life, you have to do your research. While buy-sell agreements are ideal for some businesses, that is not necessarily the case for all companies. Since buy-sell agreements work in concert with life insurance policies, be sure to take into consideration the costs associated with a policy. Keep in mind that when the number of partners increases, so does the number of policies funding the buy-sell agreement that are needed to account for the multiple scenarios that may occur. 

Since planning for the future is something that we do for all aspects of our lives—our families, our estate, our retirement—one should not forget their company. Planning for your company’s future is essential to ensure things will run smoothly beyond your lifetime. Take the time now to look into your options, and secure that peace of mind that you, your family, and your key business associates deserve. 

Start protecting your business today! Call one of our financial professionals at 866-496-2657.

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