Planning for the future of your business can involve product innovation, new competitors, or finding capital for growth. It also means planning for future leadership and ownership. Failing to plan for future ownership and leadership can put the business in jeopardy.
Fortunately, succession planning doesn’t have to be an overwhelming and paralyzing prospect. Establishing a buy-sell insurance agreement can be a relatively simple way to begin.
Questions that a buy-sell insurance agreement can help you resolve
- What do you envision for your company when you are no longer involved?
- How would the business be affected if a key employee or partner suffered an illness or injury that lasted several months or years?
- If you or another owner died prematurely, how would the business continue?
Buy-sell agreement fundamentals
A buy-sell insurance agreement documents how the business interest of a partner will be compensated by the remaining partners if one is unable to continue in the business due to disability or death. It establishes the sale price of the business interest and to whom it may be sold. It is usually invoked when a partner retires, wants to leave the business, dies, or becomes disabled. The parties agree to either a stipulated purchase price or the method used to calculate the purchase price.
Buy-sell agreements are most effective when fully funded, meaning that the agreement provides for the capital required for the purchase. That is where insurance products make the difference.
An insurance policy, life insurance, disability insurance or both, is purchased on each partner. The amount of insurance coverage equates to the stated value of the business interest. Policy(ies) are paid for by the business or individually by each partner. If a partner becomes disabled or dies, the policy proceeds are used to buy the partner’s share of the business. Sole proprietorships may similarly use buy-sell agreements as a business continuation tool by naming a key employee(s) as the buyer.
Without an agreement in place, the value of the business interest must be negotiated and agreed upon at the time of the sale putting the buyer or seller at a disadvantage. The buyer must raise capital to complete the purchase often within a short time frame. The death of a partner may also mean that a surviving family member inherits the business interest and now becomes involved in these negotiations, and in effect becomes the new partner.
Collaborating with professionals
Establishing a buy-sell agreement usually involves financial professionals, and a CPA and/or attorney. The insurance component of a buy-sell agreement is what offers the certainty that the required funds will be available when needed.
Heffernan Insurance Brokers has the expertise, services, and insurance knowledge to help prepare your business for the future – the future you plan and the future you don’t plan for. We serve the retirement and insurance needs of businesses, business owners, and individuals. Our goal is to help clients keep the money they’ve earned. Call us at 800-437-0045 to learn how we might serve you.