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Buy-Sell
Agreements and Your Future
 Nine
out of 10 U.S. businesses are family owned, but seven out of 10 won’t survive
to the next generation. The chief culprit? A majority of business owners don’t
have a plan in place to control what will happen when they leave the business.1
The fact is, all small businesses must face changes in ownership and leadership
at some point. How well prepared the business is for that eventuality may very
well dictate whether it survives the change.
 One
way to govern changes in ownership is to put a buy-sell agreement into place.
This agreement can predetermine buyout procedures in the event of death,
disputes, financial difficulties, or even the planned departure of a business
owner.
When and Why
Many business owners are so focused on the company’s day-to-day needs that
they forego planning for the future. But consider what might happen to a
business if one of these events took place.
• An owner dies or becomes unable to work, and has family members who depend
on the business for income.
• An outside party offers to buy one partner’s interest.
• A partner goes through a divorce and the ex-spouse stands to receive a share
of ownership.
• An owner files for personal bankruptcy.
For the unprepared, each of these events can trigger unpleasant consequences. Or
they can trigger a buy-sell agreement, which can help protect heirs or partners
and potentially keep the business moving forward.
How
Funding a buy-sell agreement can be accomplished in several ways. Some
businesses may be able to carry on with cash reserves. But it can be challenging
to tuck away significant sums in case of a disaster that may never occur.
Borrowing money and/or making installment payments after the triggering event
are other options, but many businesses might not be able to endure that kind of
financial burden and still operate efficiently.
The death benefit from a life insurance policy can help provide sufficient cash
in the event that one owner dies unexpectedly.2
As long as the premiums are up-to-date and there are no
outstanding loans, you can count on the face value of the policy. If the
business faces other circumstances that require a buyout, the potential cash
value of the policy can be tapped as well.
Building a successful business is a long, difficult process. If major changes
occur, a buy-sell agreement can help facilitate the transfer of ownership and
compensate all parties fairly for their interest in the business.
1) Orange County Register, July 22, 2002
2) The cost and availability of life insurance depend on factors such as age,
health, and the type and amount of insurance purchased. Before implementing a
strategy involving life insurance, it would be prudent to make sure that you are
insurable by having the policy approved. The guarantees provided by the
insurance company are contingent on the claims-paying ability of the issuing
company.
© 2003 Emerald Publications
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