How Big Is Your Buy-Sell Risk? Other Shareholders will Leave…!
Buy-Sell Agreements and Life Insurance
►Create the Buy-Sell. Business owners typically require other owners to enter into buy-sell agreements with the company and/or other owners, providing that the company (or other current owners) shall have the right to purchase the ownership interest of an owner exiting due to retirement, disability, or death.
Key Elements. A buy-sell agreement may be drafted to adjust over time and provide a buy-out price for whenever an owner decides to leave the company. The buy-sell agreement can accomplish many things and often benefits both the company and the departing owner. A buy-sell agreement can create a market for the business interest; establish the purchase price of business interest; provide restrictions on the transfer of business interests by exiting owners; provide business continuation plan; and assure the business continues to be able to provide for owners and employees.
What happens if the company cannot afford the purchase price for the ownership interest owned by the exiting owner? Life insurance on the lives of the owners is one way to ensure that the company will be able to exercise its rights under the buy-sell should the circumstances arise. If the exiting owner dies, the life insurance proceeds can pay for the complete value of the deceased owner’s interest to the company, permitting the company (or other owners) to purchase the deceased owner’s shares. This, in combination with a buy-sell agreement, can ensure that the ownership interest is not passed down to an untrustworthy heir of the deceased owner or (potentially worse) put on the open market! If an owner is ready to leave the company, the cash value of the life insurance policy can be used as a down payment on the purchase price of the exiting owner’s business interest.
ASG develops business continuation/succession plans that includes a buy-sell agreement and a life insurance policy on one or more of the owners’ lives. We help our clients fill the gaps with the necessary insurance.
Aspen Services Group, LLC
Bob Sailer, President