A buy-sell agreement protects a business’s future if an owner can no longer participate. Therefore, this document should be reviewed and updated regularly as the company develops and changes.
There are several reasons why it’s crucial to have a robust buy-sell agreement in place:
- To ensure the business can continue operating if an owner dies or cannot participate.
- To provide for a smooth ownership transition if an owner wants or needs to sell their share of the business.
- To protect the owners’ investment in the business by setting clear guidelines for how the business will be valued and sold in the event of a forced sale.
- To avoid disputes among owners about what should happen to the business in the event of an owner’s death, disability, or retirement.
- To help ensure the business will be sold to a party who shares the owners’ vision for the company’s future.
- To provide financial security for the owners and their families if the business is forced to close.
A buy-sell agreement can be a complex document, so it’s essential to work with an experienced business attorney to draft or review the contract. Doing so will help ensure that the agreement meets the specific needs of your business and is legally binding.
7 Questions to Check in With Your Business Owner Clients About Their Succession Plans
As the baby boomer population ages, more business owners are considering succession planning. Succession planning is transitioning ownership and control of a business from one generation to the next.
Some factors need to be considered in any succession plan, including:
- Does the current agreement protect you and your business during planned and unplanned events, such as disability, death, retirement, divorce, and disagreement?
- Does the agreement specify a mandatory buy-out if an owner becomes disabled or dies?
- Is the agreement funded adequately with life and Disability Buy-Out (DBO) insurance?
- Do you know the value of the business?
- What is the purchase price listed in the agreement?
- What are the estate planning considerations for the owner(s)?
- What must buy-sell agreement provisions be in place to protect the business and the owner(s) in the event of death, disability, or retirement?
Succession planning can be complex, so working with an experienced business attorney is essential to ensure that all the necessary considerations are considered.
Insurance & Business Continuation Plans
One of the most important aspects of a business continuation plan is insurance. Insurance can help protect the business if an owner dies, becomes disabled, or is otherwise unable to participate.
Several different types of insurance can be used to fund a buy-sell agreement, including:
- Life insurance This type of insurance can fund a buy-sell agreement if an owner dies. The death benefit can purchase the deceased owner’s share of the business from their family or estate.
- Disability insurance This type of insurance can fund a buy-sell agreement if an owner becomes disabled and cannot participate in the business. The disability benefit can purchase the disabled owner’s share of the business from their family or estate.
- Key person insurance This type of insurance is taken out on a critical company employee. If the key employee dies, the death benefit can help keep the business afloat while a replacement is found.
- Business interruption insurance This type of insurance can help cover the costs of keeping the business running if an owner dies, becomes disabled, or is otherwise unable to participate.
- Buyer’s beware insurance This type of insurance protects the business if a new owner cannot repay a loan used to purchase the company.
- Sellers beware of insurance This insurance protects the seller if a buyer cannot repay a loan used to purchase the business.
- Partnership Insurance This type of insurance can fund a buy-sell agreement if one of the partners dies, becomes disabled, or is otherwise unable to participate in the business.
- Stock-redemption insurance This type of insurance can fund a buy-sell agreement if one of the shareholders dies, becomes disabled, or is otherwise unable to participate in the business.
- Business owner’s policy This insurance policy can help protect the business in various events, including fire, theft, and liability.
- Worker’s compensation insurance This type of insurance is required in most states and can help cover the costs of medical treatment and lost wages for injured employees on the job. It’s essential to work with an experienced insurance agent to determine which types of insurance will be the best fit for your business.
Conclusion
As you can see, there are some critical considerations when succession planning for your business. Insurance can be a vital part of a buy-sell agreement. It can help to protect the business if an owner dies, becomes disabled, or is otherwise unable to participate in the business.
