Plan for your business succession with buy/sell agreements and life insurance.
As a business owner, you’re a cornerstone in the success of your company. However, if something should happen to you, it’s important that your business is prepared to move forward, while handling your departure. Protect your business by developing a succession plan and investing in the right buy/sell agreements. Prior to entering into any agreement, it is very important to consult with your lawyer and tax advisors.
Developing a Plan
When you’re suddenly unable to run your business, or you leave for any reason, including death, you leave the potential for serious business problems. Creating a buy/sell agreement sets forth what will happen if one of the co-owners leaves and it will make the transition smoother. There are two main ways that an agreement can be structured to provide your company with a succession plan:
- Cross-Purchase Plan: Under a cross-purchase plan, each company shareholder agrees in advance to buy the shares of the withdrawing shareholder, who in turn agrees to sell their shares to them.
When shareholders execute the cross-purchase agreement to buy each other’s stock, they must have personal funds to do so when a shareholder withdraws. For this reason, life insurance is commonly used to provide funding. Each shareholder buys a life insurance policy on the others, pays the premium and is the policy’s beneficiary. The cross-purchase agreement works best when the total number of total shareholders is small, since each person could have multiple life policies to maintain.
- Entity Purchase/Stock Redemption Plan: With this plan the company agrees to purchase the interest of a business owner in the event of death, disability or retirement. While this obligates the company to purchase the departing owner’s shares it also mandates that the departing owner, or their heirs, sell their business interest back to the company. Life Insurance is the most convenient, effective and economical tool for funding. Each owner is party to an agreement where the business purchases a life insurance policy on the life of each owner in an amount equaling their respective interest in the business. The company is the premium payer, policy owner and the beneficiary. In the event an owner dies, the company receives the proceeds of the life insurance policy to purchase the decease’s interest of the business.
Benefits of Planning.
Investing in a buy/sell agreement for your business is a wise business decision. It ensures that your business will be well-cared for should something happen to you. However, it also gives your business the means for a fair exchange and equitable transfer of management. Additionally, it helps to provide the financial resources for your heirs to tie any loose ends like paying estate taxes.