Many a family business has been thrown into chaos when a key person dies unexpectedly. This is compounded when there are partnerships involved.
What happens if you own a stake in a business and one of your partners passes away? Will their spouse take over? Their children? What if they’re not interested and want to sell their share and you can’t afford to buy them out?
Scenarios like this can be planned for and taken care of by a combination of a buy/sell agreement and the right type of life insurance.
Buy/sell agreements are legally binding documents that state that upon a triggering event (such as a death) an owner must sell his or her business interest to the remaining owners or to the business itself. These agreements typically contain provisions that detail how the buyout will be structured, making sure that the business remains operating, and that any remaining heirs or partners are fairly compensated for their ownership stake.
These agreements also include provisions for valuing the business interest, which helps determine a fair price for the buyout. Valuation methods can be agreed upon in advance, preventing valuation disputes that may arise when ownership changes hands.
Buy/sell agreements can help ensure the continuity and stability of your family business by providing a predetermined plan for the transfer of ownership. They prevent potential disputes or disagreements among family members by establishing clear guidelines and procedures for the buyout process.
One of the ways to fund a buy/sell agreement is by having each person with an ownership stake in the business have a life insurance policy naming either the surviving owners, a trust, or the business entity itself as the beneficiary. The policy payout should be enough to cover the estimated value of the business ownership interest.
When it comes to funding a buy/sell agreement, there are primarily two types of life insurance policies commonly used:
Term Life Insurance
Term life insurance provides coverage for a specific period, typically from 10 to 30 years. It offers a death benefit if the insured person passes away during the policy term. The coverage amount can be structured to align with the value of the business ownership interest, ensuring that there are adequate funds available to execute the buyout in the event of the insured person’s death.
Whole Life Insurance
Whole life insurance provides coverage for the entire lifetime of the insured person, as long as the policy premiums are paid. These policies combine a death benefit with a cash value component that grows over time. The cash value can be accessed during the insured person’s lifetime and can potentially be used to fund the buyout of the business ownership interest.
Talk to your business lawyer about drafting a buy/sell agreement for your family business, or for any business where you are an active stake owner. I can work hand in hand with your attorney to create the right type of insurance policy to fund your agreement and to make sure you, your family, and your business partners are covered.