Buy Sell Agreements and Business Separation Insurance
There are a lot of ambitious people that start small businesses in Pasadena and Glendale, California. The San Fernando Valley is also full of interesting entrepreneurial endeavors in places like Encino, Van Nuys, Northridge, North Hollywood, and Sherman Oaks. A buy sell agreement can be part of an estate planning strategy for small business partners in these areas.
What are Buy/Sell Agreements?
The best way to explain what buy sell agreements are all about is through a simple example. One form of buy sell agreement is the cross purchase plan. Let’s say that you and a partner have been running a successful property management company for a number of years. When you are planning your estate, you recognize the fact that your share in the business is your most valuable asset. Your partner is in the same position.
If you were to predecease your business partner, she would like to continue running the operation, and you would like to do the same if your partner dies first. How do you account for this dynamic when you are engaged in your estate planning efforts? A commonly embraced solution would be the buy sell agreement called a cross purchase plan.
First, you and your business partner determine the value of each share in the business. You then take out insurance policies on one another that are equal to the value of a business share. When one partner dies, the insurance proceeds will be collected by the surviving partner. The money will be used to buy the share that was owned by the deceased partner from their family. The family will have liquidity that can be spread among multiple heirs, and the surviving partner can continue to operate the business.
The redemption agreement is another type of buy sell arrangement. With this type of agreement, a company that is owned by multiple people will purchase life insurance on each of the respective owners. In the same manner as the cross purchase plan, after the death of one of the owners, the insurance proceeds will be used to buy that share from the family surviving members.
You, as a business owner, need to plan for future unexpected events that may affect your business from current and long-term financial goals. A funded buy-sell agreement is an essential planning tool to help you enhance the stability and financial value of your business.
Buy-sell agreement can:
- Prepare departing owners a market and price for an asset that might otherwise be hard to sell.
- Enables remaining owners to prevent an unqualified individual from acquiring an interest in the business.
- Reduce business disruptions resulting from disagreements among owners at various triggering events.
- Offer assurances to employees, customers, suppliers and creditors that the business will remain strong through owners’ transitions.
- Assist owners use their business as a source of retirement income.
In our experience, people who have these agreements in place contain a surprising number of inaccuracies due to the fact they are often filed away some time ago and never revisited again. By correcting these today, you will be able to enhance the stability and value of your business.