Using Buy-Sell Agreements To Protect Your Business

Using Buy-Sell Agreements To Protect Your Business

It is human nature to not want to think about what could happen if a worst-case scenario were to play out. It is this apprehension that prevents children from wanting to discuss life insurance beneficiary arrangements with their parents and it is also this apprehension that prevents business partners from protecting themselves in the event that one partner should pass away or become disabled.

The reality is that discussing contingency plans with business partners is just smart business. Our business experts have coached many companies through the process of setting up and funding buy-sell agreements. It is a difficult topic to approach at first, but the reality of what could happen if there is not a buy-sell agreement in place often gets everyone talking about a good plan.

What Is A Buy-Sell Agreement?

A buy-sell agreement is a legal document that is signed by all of the partners, owners, and major shareholders of a company that explains what will happen to the shares of one of those key players if they should pass away or become disabled. Without a buy-sell agreement in place, a partner’s shares in a company revert to his estate and it could take the company years to recover the value of those shares.

The buy-sell agreement outlines exactly what will happen to those shares in the event something were to happen, what the value of those shares will be, and what will happen with the remaining partners. It is a comprehensive agreement that is essential for the long-term success of a company. It is the succession plan that your business needs.

How Is A Buy-Sell Agreement Structured?

In almost every case, a buy-sell agreement is funded by a life insurance policy that has the premiums paid by the company. In many instances, the disability portion of the agreement is funded by disability insurance. The premiums for the insurance that backs a buy-sell agreement can be fairly expensive, but the cost of not having this kind of agreement in place can be substantially higher.

A lawyer drafts the buy-sell agreement and then a risk expert places the proper insurance coverage on it. Our business consultants are extremely knowledgeable on structuring insurance to back buy-sell agreements and we know that we can help protect your family and your business for many generations to come.

What Happens When A Buy-Sell Agreement Is Executed?

In the unfortunate event that a business partner or major shareholder should become disabled or pass on, the terms of the buy-sell agreement automatically go into action. The company accountant tabulates the number of shares the parting member held and then uses the buy-sell agreement to determine the overall value of those shares.

That money is then drawn from the insurance coverage and paid to the deceased or disabled’s estate. The buy-sell agreement will then outline how those shares will be distributed and how the company will move forward.

It is always unpleasant to think about unfortunate circumstances, but it is good business to prepare for every possible contingency. A buy-sell agreement backed by good life and health insurance coverage is the best way to protect your business in the future. It can be part of your company’s succession planning and it will also make sure that the family of the departed or disabled key member is taken care of in a fair and equitable manner.