What would happen to your business or your family if something happened to you?
In an earlier post we looked at the importance of having a buy-sell agreement and why it was important to review them regularly. Today we are going to look at the types of buy-sell agreements and ways to fund them.
For most business owners their business is the most valuable asset they own. So why do so many business owners neglect to protect that asset. If you have partners or even if you are a sole owner you owe it to your family, employees, and clients to have a plan in place for the time the other guarantee is called in.
Types of Buy-Sell Agreements:
There are two main types of buy sell agreements that are commonly used by businesses:
Cross-Purchase Agreement. In a cross-purchase agreement, key employees (or other shareholders) have the opportunity to purchase the ownership interest of the deceased shareholder. Each key employee or shareholder takes out an insurance policy on each of the other key employees. Cross-purchase agreements are usually used in smaller companies with not many employees or shareholders to cover.
Stock-Redemption Agreement. Stock redemption agreements are formal agreements between each of the shareholders, and the business itself, under which the business agrees to purchase the shares of deceased key employees. Key employees, or their estates, agree to sell their shares to the company in exchange for a cash value.
Funding a Buy-Sell Agreement:
There are several methods for funding a buy-sell agreement. Which one makes the most sense obviously depends on the shareholder and the company’s financial position.
Set Aside Funds. Money can be set aside, as long as it is easily accessible. These funds need to be there when the unthinkable happens so they need to be there for the life of the company. Far too often this method provides a temptation during financially difficult times.
Borrow the Funds. A company may be able to borrow the funds needed for the buy-out. However this may put undue stress on the company during an already difficult time.
Life Insurance. Purchasing a life insurance policy in order to fund a buy-sell agreement is an option when preparing for the future. Using life insurance enables the buy-sell agreement to be funded with premium payments and attempts to insure that the money will be available when it is needed. Many factors go into the underwriting and affordability of a life insurance policy. Discuss this with your financial advisor to determine if life insurance makes sense for your situation.
Buy-sell planning should be a vital part of every business owners plans. Don’t neglect to protect your most important asset. Having built my career working with business owners I have significant experience in this area and enjoy developing plans to protect family businesses.
A Thought From The Factory on Main
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.