Last Updated: August 2019
Buy-sell agreements are extremely common and life insurance is the common way to complete them.
Planning for the future with your business is equally as important as planning for your own families’ financial protection and buy-sell agreements can ensure that businesses can continue well into the future regardless of the circumstances that arise.
They can help protect the business from unexpected ownership changes and serve as a major peace of mind for business owners of all kinds.
This brief article will explain what a buy-sell agreement is and how life insurance can help you structure it properly.
Here’s an overview of today’s article:
- What is a buy-sell agreement?
- How does life insurance help a buy-sell agreement?
- Types of buy-sell agreements
- Let Us Help You With Your Buy-Sell Agreements, We Have The Resources and Experience
What is a buy-sell agreement?
Using life insurance to fund a buy-sell agreement is a very common strategy for business owners.
Whether you own a large company or a small family-operated business, the success of any business depends on smart strategy and planning. The death of an owner or partner can be an uncertain time for the life of a business.
A buy-sell agreement can help protect your business from the effects of unintended or unwelcome transfers of ownership. It may also help protect your heirs by providing an opportunity to turn inherited business shares into cash.
A buy-sell agreement is a legally binding contract between co-owners of a business that outlines steps to be taken in the event that one of the owners dies or otherwise leaves the business.
Think of it as a will for the business.
Buy-sell agreements are drafted by an attorney and usually contain legally binding clauses like:
- Who can buy a departing partner or shareholder’s share of the business
- Which event could trigger a buyout? (death, disability, retirement or an owner leaving the company)
- The price to be paid for a partner or shareholder’s interest in the company
By planning ahead and taking legal steps to ensure those plans are intact in the event of a buyout trigger drafting a buy-sell agreement among business owners can help to avoid costly legal battles and financial setbacks by the business.
How does life insurance help a buy-sell agreement?
When the buy-sell agreement is created, it legally obligates 1 party to purchase the other’s interest in the business.
But where do surviving owners come up with a large sum of cash to fund the purchase?
Liquidating assets may not be an option for the business, causing owners to put their own personal property up for collateral – which puts them personally at risk.
Life insurance death benefit proceeds however transfer efficiently and tax-free (if structured properly).
So that cash is available to fund the purchase.
Types of buy-sell agreements
There are several common types of buy-sell agreements used:
Used when two partners own a business together. It begins with co-owners of the business agreeing to transfer shares or business interest in the event of a death or other trigger.
The terms (including price) are outlined in the contract and both parties sign the agreement promising to sell their share to the remaining partner or owner of the business.
So if something happens to one owner, the surviving owner has rights to the owner’s share of the business… rather than watching that portion of the business pass to the surviving spouse or heirs.
The business itself agrees to purchase any shares of the business from the deceased owner or shareholder effectively absorbing the shares among surviving owners or shareholders.
One Way Buy-Sell Agreement
This type of agreement is designed for a situation in which a company is owned 100% by one person.
In the event of an owner’s death, a one-way buy-sell agreement would arrange for the business interest to be purchased by a designated person named in the contract.
Often times this is a key employee that would like to take over the business for a predetermined price.
It’s important to protect all the hard work that’s involved in building a business.
Important: Life insurance agents do not give legal or tax advice. You’ll need to work with a qualified attorney to draft the buy-sell agreement.
Let Us Help You With Your Buy-Sell Agreements, We Have The Resources and Experience
Buy-sell agreements may sound complicated and tricky to complete but in all reality, we have done them countless times and it can be a quick and painless process.
Especially if you decide to work with the right company and agency from the start.
Rootfin offers life insurance solutions to help ensure that all the effort and money invested in the business won’t disappear when the unexpected happens.
Please don’t hesitate to contact us for instant life insurance quotes for a buy-sell agreement.
We’ve helped dozens of business owners find the lowest cost life insurance to fund their buy-sells and we’d appreciate the opportunity to earn your business.