{"id":1188,"date":"2024-11-14T19:32:03","date_gmt":"2024-11-14T19:32:03","guid":{"rendered":"https:\/\/webdesign.quoteplicity.com\/keyperson\/?p=1188"},"modified":"2024-12-12T20:06:25","modified_gmt":"2024-12-12T20:06:25","slug":"buy-sell-agreement-life-insurance","status":"publish","type":"post","link":"https:\/\/webdesign.quoteplicity.com\/keyperson\/buy-sell-agreement-life-insurance\/","title":{"rendered":"What Is A Buy-Sell Agreement Funded With Life Insurance?"},"content":{"rendered":"\t\t
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A buy-sell agreement is the practical result of comprehensive business succession planning. It is a legally binding document which protects the interests of a company\u2019s owners and permits the business to continue even in the event of the death, disability, or retirement of a business owner.<\/p>\n\n

A buy-sell agreement, commonly referred to as buy-out agreement, is drafted by an attorney and can be implemented with all forms of companies including, partnerships, limited liability companies, and corporations.<\/p>\n\n

The provisions in these arrangements are not \u201cboilerplate.\u201d Hence, careful thought and consideration with respect to the goals and objectives of each business owner is crucial. Establishing a buy-sell agreement forces each business owner to think about the issues that can impact the business and how they should be resolved.<\/p>\n\n

If you own a successful company, a buy-sell agreement should be an essential piece of your\u00a0business succession planning<\/strong>\u00a0strategy. If you fail to implement this most important legal arrangement, your business is exposed to perils that can destroy your company.<\/p>\n\n

Why wait? Make the commitment NOW to protect your business by getting your buy-sell agreement planning in order!<\/p>\n\n

Do You Need a Buy-Sell Agreement?<\/h2>\n\n

If you have a successful business with more than one owner, the short answer is YES!<\/p>\n\n

The following are just a few situations where it is crucial to execute some type of buy-sell agreement.<\/p>\n\n

When there is a need to create an instant \u201cmarket\u201d for the business.<\/h3>\n\n

This is important when it may be hard to find a buyer for the business in the event of the death or disability of a current owner. Some businesses just can\u2019t be sold in the open marketplace for various reasons.<\/p>\n\n

In these instances, a buy-sell agreement can stipulate that the remaining owners are mandated to purchase the interests of a departing owner\u2019s interest. This arrangement guarantees that the deceased owner\u2019s estate receives a fair value for their business interest.<\/p>\n\n

When there is a significant age discrepancy between the business owners.<\/h3>\n\n

Business transition is not a matter of \u201cif\u201d but \u201cwhen\u201d is an owner going to retire or eventually have to sell her business interest. This is especially true for business owners as they reach retirement age and beyond. And, while many business owners will never retire, they are not going to live forever.<\/p>\n\n

A buy-out arrangement is essential to the aging owner as it will address her exit strategy and how to extract maximum value for her business interest. This includes both supplement income for the future as well as fair market value to heirs.<\/p>\n\n

Likewise, the buy-out agreement will provide peace of mind to the remaining owners as they have a written plan in place thereby avoiding potential conflicts.<\/p>\n\n

When it is crucial to maintain control of the business.<\/h3>\n\n

Just stop and think for a moment about the circumstances surrounding your business. If you are like most owners, the last thing you need is to wake up one day and be in business with a deceased owner\u2019s spouse or child who knows nothing about the business. But it happens all the time in businesses that fail to plan.<\/p>\n\n

This potentially devastating outcome can easily be remedied with a basic buy-sell agreement that includes an automatic buy-out at the death or disability of an owner. In other words, a forced sale. With this provision, there are no arguments about ownership and the surviving heirs receive fair market value for their interests.<\/p>\n\n

A buy-sell agreement makes the transition smooth and as painless as possible given the circumstances.<\/p>\n\n

When income is needed for a departing owner or her heirs.<\/h3>\n\n

A large percentage of business owners have the majority of their assets tied up in the business. For this reason, income becomes an important issue for the departing owner and her heirs. This can create a huge financial strain on the business moving forward and cause significant anxiety to the exiting owner and family.<\/p>\n\n

For example:<\/strong><\/p>\n\n

If an owner becomes incapacitated and unable to work, what is the true impact on the business? First, the business loses the disabled owner\u2019s ability to contribute to earnings. Secondly, how is the business going to continue to pay the salary of the debilitated owner? Finally, if the disabled person is not going to be able to return to work, is there ever going to be an end to the disarray?<\/p>\n\n

A buy-sell agreement should plan for the contingency of disability. A disability buy-out insurance policy can be purchased on each owner that will protect both the business and the owner and even the owner\u2019s dependents.<\/p>\n\n

When liquidity is needed to cover estate taxes due at the death of an owner.<\/h3>\n\n

As previously mentioned, many business owners have a significant portion of their total net worth retained in their business. This is a most important reason for business succession planning.<\/p>\n\n

If an owner dies, and estate taxes are payable, without adequate liquidity to cover the estate tax, the sale of the decedent\u2019s business interest may be forced resulting in a significantly lower value for the heirs.<\/p>\n\n

A buy-sell agreement funded with life insurance can ultimately help the business avoid having to be liquidated at below market price to cover estates taxes due.<\/p>\n\n

When a professional service organization needs to maintain ownership control.<\/h3>\n\n

Many states have laws that prohibit a professional service organization like a physician\u2019s group from having non-physician ownership. A buy-sell arrangement can mandate a legal buyer for the outgoing physician\u2019s interest thereby avoiding a potentially serious problem.<\/p>\n\t\t

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Key Provisions of a Buy-Sell Agreement<\/h2>\n\n

1. Identifies potential buyers<\/h3>\n\n

The alternative are: the business buys back the stock, the remaining owner(s) purchase it or the stock is sold to an outside 3rd party.<\/p>\n\n

Is it a priority of the company to keep all stock ownership among the existing owners? In most instances probably, yes.<\/p>\n\n

It can be stipulated that if an owner plans to dispose of their business interest that they must first offer it for sale to remaining owners or the business itself. This provision is called \u201cfirst right of refusal.\u201d<\/p>\n\n

This is a most critical part of the agreement because it can guarantee that any remaining owners can maintain control of the business if they desire. Essentially, the remaining owner(s) can eliminate any competing interest from outside candidates that may not have a like-minded vision for the future of the business.<\/p>\n\n

It can also be mandated in the agreement that the remaining business owner(s) must buy the outgoing shareholder\u2019s interest when made available. As referenced above, this concept is used to \u201ccreate a market\u201d for a business interest that may not be readily sellable.<\/p>\n\n

If the business is permitted to be offered to an outside 3rd<\/sup>\u00a0party, there may be language in the buy-out agreement limiting the new owner\u2019s degree of management influence. In other words, the agreement can explicitly state that a new owner will not have the same level of managerial control as a departing owner.<\/p>\n\n

2. The agreement is based on a current business valuation<\/h3>\n\n

The agreement is based on a current business valuation which establishes the fair market value of the company and is the basis of the price and terms of sale when applicable.<\/p>\n\n