Business owners face a multitude of risks that can threaten their enterprise’s continuity, such as the death, disability, or retirement of a partner. To mitigate these risks, it’s essential to have a clear plan in place for the transfer of ownership and management.
Buy/sell agreements and life insurance policies are two critical components of such a plan. A buy/sell agreement is a contract that determines how the business’s ownership will be transferred in the event of a triggering event. Life insurance policies are used to fund the buy/sell agreement, ensuring that the surviving partner can buy out the deceased partner’s share of the business.
In this article, we will explore the importance of buy/sell agreements and life insurance for protecting your business. We will delve into the various funding options for life insurance policies and provide expert insights from financial services industry consultant Eric Benchetrit. With his extensive experience in the field, Benchetrit will explain the nuances of selecting the right life insurance policy and working with an independent broker to find appropriate coverage for unique business risks.
By the end of this article, you will have a better understanding of how buy/sell agreements and life insurance policies can safeguard your business’s future and prevent conflicts among partners.
- Buy/Sell agreements are important contingency plans for buying out a partner’s interest in a business, covering events such as death, deterioration, retirement, disability, misconduct, incarceration, or divorce.
- Well-drafted agreements establish rules for an orderly wind-up or restructure and are typically funded through life insurance for immediate liquidity and continuity of management.
- Choosing the right type of life insurance policy is important, with term life insurance policies being appropriate for businesses likely to be sold to a third party within the next decade, and permanent life insurance being better for businesses with an internal retirement buyout plan or family business succession.
- Funding a buyout can be done through different options such as corporate profits, installment payments, or bank loans, and working with an independent broker can provide unbiased advice and access to a wider variety of insurance carriers.
Buy/Sell agreements serve as contingency plans for various events, such as death, disability, retirement/exit, serious misconduct, or divorce. These agreements are crucial for establishing an orderly wind-up or restructure of a business.
Funding through life insurance can provide immediate liquidity and continuity of management, as outlined in the pre-existing knowledge. It is essential to choose policies that match the buyout need and timing considerations. Failure to account for business growth is a common pitfall when choosing an insurance solution.
It is important to re-evaluate the agreement and policy type every 3-5 years to ensure that it still meets the business’s needs. When setting up a life insurance policy to fund a buyout, there are other considerations to keep in mind. Tax legislation, creditor protection, and overall complexity are all important factors to consider.
It is crucial to choose policies that are matched to the buyout need and timing considerations. Choosing the wrong policy can lead to unexpected costs or even the inability to complete a buyout. Working with a trusted advisor and an independent broker can provide unbiased advice and access to a wider variety of insurance carriers, ensuring that business owners find appropriate coverage for unique risks.
Different options for funding a buyout exist, including using corporate profits, installment payments, or bank loans, each with their own advantages and disadvantages.
Corporate profits can be a straightforward way of funding a buyout, as it does not require additional borrowing or interest payments. However, relying on profits can be risky, as unexpected expenses or a downturn in the business can reduce the amount of available funds.
Installment payments can also be a viable option, as it allows the buyer to pay for the business over time, and can be less risky than relying on profits. However, installment payments may not be feasible for all buyers, as it requires a significant amount of capital upfront.
Bank loans can provide a source of funding for a buyout, and can be a good option for businesses with a strong credit history. However, bank loans may come with high-interest rates, and require a significant amount of collateral.
Working with an independent broker can provide unbiased advice and access to a wider variety of insurance carriers, including those that offer customized buy/sell agreements and life insurance policies. Independent brokers can help business owners find appropriate coverage for unique risks and can assist in weighing the pros and cons of different funding options.