Protecting Your Business and Your Family with a Buy-Sell Agreement

The successful business you and your partners built together took years of hard work and a great deal of capital. You certainly want your business to remain prosperous long into the future. Preoccupied with the day-to-day details of running the operation, you probably haven’t given much thought to what would happen if circumstances abruptly took an unexpected turn. What happens if you or your partner becomes disabled? Worse yet, what if one of you died suddenly? Could your business survive such trauma? Would your heirs be able to take over or would they be forced to sell the business?

Partnerships Are Not Eternal:
Unlike a corporation, a partnership does not have an unlimited life. When a partner dies, the remaining partners legally become liquidation trustees. This obligates them to sell off the deceased owner’s share of the business. But to whom? At what price? That’s why business succession planning is so important. You’ll want to put into writing a formal plan of action that will allow a smooth transition of ownership and protect your family’s interest as well. A buy-sell agreement is one way to help assure the continuity of your business and give your family peace of mind.

Benefits of a Buy-Sell Agreement:
Sometimes called a “business will,” a buy-sell agreement is a legal contract among business owners that states what will happen should a partner leave the business due to death, disability, or a lifetime situation such as retirement. The agreement obligates the remaining owners to purchase the business interest of the partner who has left the business, and the departing partner (or heirs) is obligated sell. This type of arrangement benefits your family in a number of ways: it will help free them of business worries at a time of crisis, guarantee a purchaser, and, if kept up-to-date, ensure a fair price for your business interests. Remaining owners also benefit from a buy-sell agreement: they know the purchase price of the business interests in advance; they don’t have to worry about new, perhaps unwanted partners; and the smooth transition will help the company retain the confidence of clients and creditors. With the help of an attorney, these agreements are easy to draft and flexible, allowing for alterations with the consent of all parties involved.

How You Can Fund Your Plan:
Once a buy-sell agreement is in place, the next challenge is funding it. Where will remaining partners get the funds to purchase the business interest in question? There are a number of available options:

Pay Cash - If sufficient funds are on hand, cash may be used to purchase the business interest in question. However, using savings that were earmarked for future ventures could endanger the long-term goals of the business.
Take A Loan - If cash is not readily available, funds could be borrowed. The downside is that the extra expense of loan repayments may put a strain on cash flow and the debt increase may negatively affect the company’s credit rating.
Sell Assets - Another alternative is liquidating assets to raise the money. This method could have a devastating effect on the business’s future, and should be considered only as a last resort.

The Sensible Solution:
It becomes clear that a proper funding vehicle is needed to make a buy-sell agreement as effective as possible. With its many advantages, insurance can be a convenient means to fund the agreement without incurring a large financial burden. Insurance creates a guaranteed source of funds to purchase the business interest in question. Proceeds are immediately available exactly when they are needed: in the event of the death or disability of the insured. In effect, it could be said that the cause that creates the need also creates the funding. Those proceeds are, in most instances, free from federal income tax, and may help avoid the delays of probate. A buy-sell agreement funded by insurance may be structured in a number of different ways to suit particular needs.

Now’s the Time:
It’s best to consider your options now while you’re still in the position to direct your business. Speak with your partners and your family, as well as your legal and tax advisors and your insurance agent. If you’re like most business owners, your business and your family are the two most important things in life. You don’t want to gamble with the future of either one. A buy-sell agreement funded by insurance is a convenient way to put your business affairs in order while protecting your family’s interests. It can give you the peace of mind you need to focus your energies on the continued success of your firm.

Contact: Jesse Maltzman, Financial Advisor of Maltzman Financial Strategies via phone at (914) 934-5612 or visit his website http://www.maltzmanfinancial.com