Did you know that you can use a buy-sell agreement to insure your business? The truth is; most businesses are turning to buy/sell agreements to protect themselves from loss of revenue among other financial hardships.
What is a buy-sell agreement?
A buy-sell agreement is simply a legally obligating contract between two or more parties within an organization stipulating how a specific partner’s share of a business is to be reassigned upon their death or disability. Usually, there are two major types of buy-sell agreements, namely; cross-purchase and stock-redemption agreements.
1. Cross-purchase agreement
This kind of agreement is ideal for start-up, small, and medium-sized companies with a small number of key employees. Cross-purchase agreements empower key employees to purchase deceased or disabled key members ownership interests. Key employees are required to take out policies on each other.
2. Stock-Redemption Agreement
This is a formal agreement between key employees and the company, organization or business. Stock-redemption agreements allow businesses to purchase their deceased key employees’ stocks or shares for the cash value of the company.
Key features of a buy-sell agreement
- It’s a contingency plan
- It’s insurable
- Requires regular updating
- It clearly defines triggering events such as disability, divorce, debt, conflict, retirement, and death.
How is a buy-sell agreement funded?
Well, a buy-sell agreement can be funded in various ways including;
- Earnings accumulation
- Death benefit insurance
- Borrowing or loans
- Employee stock ownership plans funded
- Life insurance
What are the benefits of insuring your business with a buy-sell agreement?
1. Business continuity
In case of a major life event that affects any key employee, a buy-sell guarantees business continuity. The remaining key employees will have enough money to purchase a deceased key partner’s company share thus; increasing your business’ ability to prosper immensely. In addition, these agreements also provide management continuity efficiently.
Buy-sell agreements funded with life insurance are highly advantageous. The death benefits from such agreements are by and large income tax-free.
3. Ownership control preservation
In an event of a partnership business, a buy-sell agreement restricts members of the deceased key employee’s family from assuming positions of business partners.
4. Fast access to liquid assets
A buy-sell agreement provides members’ of a deceased partner’s with a lump sum of cash to pay off debts among other expenses. To add to that, the remaining key employees receive prompt payouts to sort out the buy-sell agreement without inconvenience.
5. Establish Fair Market Price
Buy-sell agreements are excellent for establishing a fair selling price of your shares. Should you die unexpectedly, it’s obvious that members of your family will want to sell your share of the company. In such cases, the living key partners have a right to take advantage of the situation to pay less for your portion of the business.
6. Protect Your Investment
These agreements offer protection for your investment in terms of estate liquidity, business value, stability, improved credit accessibility, and retirement security.
There’s wisdom in consulting a reputable insurance expert for advice when considering insuring your business with a buy-sell agreement.