By Dan Schulte, Senior Vice President and Manager, Annuities and Insurance
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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 is important to consider the situation when one of the business owners is ready to depart the company, either voluntarily or involuntarily. For instance, let’s say your partner wants to leave the business, becomes incapacitated, or even passes away. What measures can you take to address such a situation? A potential solution is a buy/sell agreement.
Buy/sell agreements are common among multiple-owner businesses. In their 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.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.