INSURING YOUR INCOME-EARNING ABILITY
"What will happen to my business if something happens to me? What will happen to my family if something happens to my business?"
Being small-business owner means living with uncertainty. Many owners of small or closely held companies, however, have reduced that uncertainty and bolstered their family's financial security by having insured buy-sell agreements drafted for their businesses.
What Is A Buy-Sell Agreement?
It's a legal document, drafted by an attorney, to provide for the smooth succession of your business. The agreement spells out the terms under which a designated co-owner, employee, heir and/or other party will buy your interest if you die, retire or become disabled. The intent is to help assure that the business continues and, most of all, that your dependents outside the business receive the fair market price, in full, for your interest.
Who Needs a Buy-Sell agreement?
You do if, as a sole proprietor, partner or co-owner in a closely held business, you:
How Does It Work?
You and your successor(s) enter into a legally binding contract, drafted by an attorney. Under the terms of the agreement, when specified events occur (such as your death, disability or retirement), the successor(s) purchase your interest. The contract generally includes the actual purchase price or provides a formula for determining the price.
Most agreements also identify how the agreement will be funded. This helps assure that the money will be available to carry out the purchase. While there are several funding options -- sinking funds, loans, installments -- insurance on the owner is one of the most popular, since it helps assure that dependents will receive the full purchase price in cash.
Why Should I Find Out More?
An insured buy-sell agreement helps protect the interests of your successors, as well as family members not involved in the business. Its greatest benefit is that it replaces chance with written guarantees, including the funding to carry out the agreement.
When life insurance is used as a funding medium, it provides the necessary cash for a free-and-clear buyout. Additionally:
The Plan in Action
Bill and Ted have been landscaping together as equal partners for 10 years. Their business had recently been valued at $1,000,000. Both men have families who have no interest in the business. They recently met with their attorney and drafted a buy-sell agreement which calls for each to buy the other's share if one dies. They also met with their insurance agent and purchased $500,000 policies on each other's lives.
If Bill dies, Ted will receive $500,000 in insurance proceeds. This money will be used to purchase Bill's share of the business from Bill's widow. Ted will get the business free and clear, while Bill's family will get a fair market price for his share.
Where Can I Get More Information?
An insured buy-sell agreement can create a win/win situation for you, your business associates and your family. For more information, contact your financial advisor and attorney.
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I get tremendous gratification from encouraging people to focus clearly on their future final success and security.
Larry Brasel, President