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As a business owner, preparing a succession plan is vital for the continuing stability of all you have worked to build. You should plan for business succession now before the need arises. One of the key components of a business succession plan is a carefully crafted buy-sell agreement.
A buy-sell agreement is a contract designed for retirement planning and to facilitate the transition of the business should the owner die unexpectedly or sustain a disability. Its primary functions are to create a market for a deceased owner’s business interest and to legally bind the owner’s estate to sell their shares for a predetermined price to partners or shareholders (a cross-purchase agreement), to the business itself (an entity agreement), or both (a hybrid, or “wait-and-see” agreement).
Thankfully, there is not just one way to fund a buy-sell agreement and you can use whichever method best fits your situation. We encourage you to speak with your advisor so that you can best know which method is the right fit for you.
The life insurance method of funding buy-sell agreements is taking out a life insurance policy on the present business owner or owners. Following an owner’s death, this common, cost-effective method makes cash available. Another reason why a life insurance policy may be a great planning tool for your buy-sell agreement is if the policy has cash value in permanent life insurance, a buyout of the business after retirement may be possible with those policy funds.
In this method of funding buy-sell arrangements, business profits are held back and used to cover the cost of a buy-sell arrangement. However, should an owner become deceased following the implementation of this strategy, then the business may not be able to accrue the necessary funding to fulfill its redemption obligation.
Buy-sell arrangements can also be funded by installment purchases. Keep in mind that this strategy has considerations due to its tendency to inhibit cash flow, which can cause dramatic effects if the interest purchased belongs to a majority owner. No cash flow could mean no business.
Borrowing funds is always an option. As most know, borrowing money to pay off debts comes with its downsides. Obtaining a loan may not be easy for the remaining partners or owners because the business will no longer have a key member of their business. Another cause for concern is if the business can acquire a loan for the buy-sell arrangement, future loans, whether for growth or as cash flow, may prove to be difficult.
No matter what method to fund the buy-sell agreement is chosen, taking action before it is too late is the most critical part. You deserve the help of trusted financial professionals, and Bridger Finacnial can help you! Work with us and discover which method will best fund your Buy-Sell Agreement and protect your assets.
Don’t forget about other business planning areas.
Years of experience have prepared us to guide you through your life transitions.