You’ve spent your life building your business, and you want to leave it to your successors when you retire in good health. But since a sudden death, serious illness, or even divorce could spell disaster for your business, it’s always better to draft a back-up plan before you ever have need for one. Otherwise, it could become difficult for co-owners or your heirs to negotiate muddy waters during a highly emotional time.
Two choices for succession. While there may be more creative, out-of-the-box solutions out there, most business owners choose from two types of succession plans.
A buy-sell agreement is a legally binding contract that establishes how ownership shares will be transferred in the event of your death, retirement, or other event. A sale price is established for the shares, or all parties agree upon a formula which will determine the value of shares when the transfer becomes necessary.
Under a one-way agreement, a specific person is designated to purchase the business when the owner dies, retires, or becomes permanently disabled.
For businesses with multiple owners, a cross-purchase agreement is often used. This contract stipulates that the remaining owners will purchase the business share of the departing owner.
But what would happen in the event that a sudden death or disability prompted a sale, for which the intended buyers have inadequate funding? This is where the right life insurance can save the day – and the future of the business. Under the one-way agreement, a permanent life insurance policy would kick in at the business owner’s death, and the beneficiary would use the death benefits to purchase the intended business. If the owner chooses to retire, the accumulated value in the life insurance policy could be used to accomplish the same purpose.
In a cross-purchase agreement, each owner of the business might maintain a life insurance policy on the other owners. In the event of an owner’s death, cash would be on hand to finance the transfer of business shares as stipulated by the contract.
Life insurance premiums and policy availability are based upon age, health, and type of policy. If you’re interested in implementing a business succession plan with a life insurance policy, please call our office at 913-381-4800.