Protect Your Business’s Future with a Buy/Sell Agreement
Article written by Jennifer Black and Dedicated Financial Solutions.
What would happen to your business if one of the owners passed away or left the company? Would the business be able to continue? Would the remaining owners agree on the best course of action? Who would own the former owner’s share of the company?
Planning is the best way to overcome the worry and uncertainty connected with the loss of a business owner. By planning for the loss of an owner in advance, all partners in the business will have the opportunity to agree on the course they will take if the situation arises.
Essentially, the surviving owners can do one of four things:
- Wrap up the business
- Allow the heir or beneficiary, if the former owner has died, to take over the owner’s role in the business
- Sell their own interests in the business
- Buy the former owner’s shares, either from the owner or their estate
Formalizing your ownership transition decisions with the other owners of your business will give you all peace of mind. A written buy/sell agreement will cover what happens with business ownership if an owner dies, retires or leaves the business for any other reason. When you talk with your business advisors about creating or updating your business’s buy/sell agreement, include the following in your discussions:
- The circumstances or events that may trigger a buy/sell transaction
- The timing and terms of the buy/sell transaction
- The process you will use to value the business and its shares
- Who will buy the former owner’s shares and at what price
- Where the money will come from to pay for the shares
It’s critical to have funding for the share purchase in place – without it, the remaining owners may not be able to afford to purchase the shares as required by the agreement or may have to compromise the business’s finances to do so. You can try to set some money aside in case your buy/sell agreement comes into effect, or you could borrow the funds or sell some assets, but the most secure way to ensure you can fund your buy/sell obligations is to buy life and/or disability insurance to cover them. Life insurance is the most affordable way to ensure the money will be there when and if you or your co-owners need it.
Talk to Dedicated Financial Solutions about whether, given your business’s specific circumstances, it makes the most sense for the company to own the insurance policy (and pay the premiums) or for individual shareholders to own policies on each other. Remember to plan for your business’s expected growth in value too – there are insurance products available with coverage that grows with your business to protect you now and in the future.
Contact us today to discuss your specific situation.
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