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Part of good business planning is ensuring that business continues even when the worst happens. One essential part of a business or even a financial plan is a buy sell agreement.
When it comes to funding a buy/sell agreement between you, your partners, and your business—insurance structured properly is the best way to provide liquid cash to help make sure your business stays in the right hands and that operations continue.
Buy/Sell Agreements for Business Owners
When you form a company, it’s hard to imagine future roadblocks that may jeopardize your operations. But in reality, things like death, illness, disability, bankruptcy, and divorce can happen at anytime. And when any of these do happen, it can put your business at risk.
In these situations, you only have a few options available to you:
- Fold the business. This option is unfortunate, especially when you’ve invested a lot of time and money into building a business. This isn’t always the most practical solution.
- Sell your shares. Will you find the right buyer for your business? Will you get the right amount for your shares?
- Continue the business. You can continue with your new partner, like the heirs or spouse of the deceased business owner
- Buyout the deceased shareholder. This is a great option if you have the liquid cash available at the time of their death.
Business partners are recommended to enter a buy/sell agreement to make sure there are written and agreed upon provisions in case any events that may impact the continuation of the company happen. That way, even if the worst was to happen, there is a plan in place.
When an owner needs to exit the business for whatever reason—or suddenly passes away— a buy/sell agreement details the exact amounts for the buyout process.
An essential step of the buy/sell agreement is funding it. You can use liquid cash or borrow money, but these have tax implications, interest costs, and may not be the most viable and convenient option for your business.
This is where proper insurance comes in. By structuring life insurance as well as considering critical illness and disability insurance, you can guarantee that you have instant liquidity that you can use to finalize the buyout process in a tax-efficient way.
What Types of Buy/Sell Agreements Exist?
There are three main ways to fund buy/sell agreements. These include:
Criss Cross Method
The criss cross method involves each shareholder agreeing to individually purchase the shares of the deceased shareholder at a valuation based on an agreed negotiation or formula.
This is funded by each shareholder purchasing a life insurance policy on the other shareholder(s) and placing the other shareholders as beneficiaries. On death, the life insurance payouts will be used to purchase the shares from the deceased shareholders’ estate.
The corporate redemption method involves the corporation redeeming the shares of the exiting or deceased shareholder. The corporation purchases life insurance policies on the life of the shareholders with the corporation as the beneficiary.
On death, the corporation will be paid the life insurance payout to purchase the exiting or deceased shareholders estate and distribute it equally to any surviving shareholders.
The promissory note includes each shareholder agreeing to purchase the exiting or deceased shareholders’ shares from the corporation based on a promissory note.
The corporation will purchase a life insurance policy with itself as the beneficiary. On death, the corporation will receive the life insurance pay out and pays the shareholder a dividend to help honour the promissory note.
Types of Life Insurance Coverage Available
Whole life Insurance is often considered a fundamental tool for funding buy/sell agreements on death. Critical illnesses and a sudden disability of a shareholder can have a big impact on your business as well.
We recommend that companies looking to create buy/sell agreements purchase a combination of life, critical illness, and disability insurance.
What Is the Best Setup for My Business?
There are multiple things to consider when planning and creating the proper insurance structure for your buy/sell agreements, including legal and tax implications.
Our Commonwealth works with legal and tax advisors to ensure that we have the proper set up for your business—as well as any estate and financial plans that you may already have in place.
Why Choose Our Commonwealth to Fund Your Buy/Sell Agreement?
Our Commonwealth works with top life insurance carriers which gives you access to the best rates and solutions on the market.
But we also take the time to get to know your unique situation. No two businesses are the same—and it’s important that you get coverage that is suitable for you and your company. We leverage the latest technology and combine it with exceptional customer service to deliver a memorable customer experience.
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