By Dan Schulte, Senior Vice President and Manager, Annuities and InsurancePrint This Post
Running a business with other people can be very rewarding and successful. Utilizing each owner’s unique abilities can often lead to the best business outcome. This is usually because you and your fellow owners have unique skills that complement each other.
However, it’s also important to consider what happens when one of the business owners is ready to leave the company – either voluntarily or involuntarily. For example, let’s say your partner wants to leave the business, becomes incapacitated, or even passes away. How could you prepare to address such a situation? A possible solution is what’s known as a buy/sell agreement.
Buy/sell agreements are common among multiple-owner businesses. In its simplest form, a buy/sell agreement is a contractual obligation for the owner that exits the business (or the owner’s estate) to sell their ownership either to the other owners (often called a “cross-sell” agreement) or back to the business itself (often called a “redemption” agreement). Such a plan often allows for the remaining business owners to maintain their percentage ownership and control of the business upon another owner’s exit.
Many times, life insurance is used to “fund” buy/sell agreements as they are usually used for protection should the business owner die unexpectedly. With a cross-sell agreement, each owner will purchase a life insurance policy on each of the other owners. When one of the owners dies, an income tax-free death benefit can be used to purchase the deceased owner’s share of the business. With a redemption agreement, the business will purchase insurance policies on the lives of the owners. When one of the owners dies, the business can use the life insurance death benefit to purchase the business interest from the deceased owner’s estate. If life insurance isn’t appropriate – or if one of the owners is uninsurable – pre-negotiated installment sales can be utilized allowing the remaining business owners to buy out the exiting business owner over a term of years.
If you’re a member of a multiple-owner business, consider creating or reviewing your existing buy/sell agreement. Preparing a business exit strategy can be as important as the daily operations of the business. Your financial advisor can help with strategies and products so that you can achieve your business planning goals.