As discussed in previous posts, life insurance has several uses for business owners. One such use is the funding of buy-sell agreements so the business can continue operating after the death of the sole owner or partner, if more than one owner. As I am not an attorney, I will not attempt to discuss how to construct a buy-sell agreement. My focus here will be on financing the agreement with a life insurance policy.
While life insurance is not the only method of funding a buy-sell agreement, other methods of financing the purchase of the business are not as convenient, efficient or practical. For example, it’s rare that an employee or other prospective buyer has enough cash to pay for the business at the exact time of the death of the sole owner or partner. Because death is an uncontrolled event, the prospective buyer has no guarantee that the required funds will be available at the time of the death. With a life insurance policy, the capital requirements are ensured.
Financing a buy-sell agreement with life insurance has many benefits for all parties involved – it ensures that the business continues operations, that the employees have their jobs and that the purchaser has ownership of a going concern, whose business has not been interrupted by the death of the owner (or partner, if more than one owner).
Other than the obvious benefits of a clean and smooth transfer of business ownership, the following are other advantages to the owner that might occur during his/her lifetime:
- Stabilized business. Because the future smooth transfer of the business has been addressed, customers and vendors may be more readily obtained and retained. Additionally, employees are likely to feel more secure and to continue to produce at a high level.
- The Sole Proprietor’s or Partner’s burden is relieved. If the purchaser in the buy-sell agreement is an employee or group of employees, they will be unlikely to leave the business or start up a competing business. Additionally, they will most likely want to assume additional responsibilities in the operation of the business.
Benefits to the heirs of the business-owner’s estate:
- The estate receives payment for the full value of the business or share of the business promptly, if more than one owner. Using life insurance to fund the buy-sell agreement guarantees that the estate receives the full value of the business (or share of business, if more than one owner) immediately after the death of the the owner.
- The surviving heirs are relieved of business worries. The surviving spouse and children are protected under an insured buy-sell agreement. They need not depend on the new owner to provide future income to the family or a representative to get the highest value for the business.
If you are considering a buy-sell agreement to ensure that your business continues upon your death, while your heirs receive the proceeds from the sale of the business, we recommend you work with an attorney well-versed in these types of agreements. If you will be funding the agreement with a life insurance policy, contact us for no-obligation quotes.