If you own your business with someone else, you NEED a Buy-Sell Agreement. And not just any Buy-Sell Agreement, but one that:
- Protects against the unexpected, and
- Reflects your current business value
Here at Consolidated Planning, our planning philosophy focuses on protecting today before planning for tomorrow.
In this article, we’ll review what a Buy-Sell Agreement is, how it is funded, and steps you can take today to ensure your life’s work is protected.
What Is A Buy-Sell Agreement?
Think of a Buy-Sell Agreement like a Will for your business. (You have one of those, right?) This agreement is a written plan that spells out exactly what happens to your share of the business in the transition of business — like death, disability, or dispute.
If you own a business with a partner or a few other people, you’re all in this together. But what happens if one of you is suddenly out of the picture? And yes, that someone could be you. That’s where your buy-sell agreement steps in. It answers the important questions like:
Who gets the departing owner’s share?
How is the value of the business determined?
Where will the money come from to buy the exiting owner’s share?
How Is A Buy-Sell Agreement Funded?
If you don’t yet have a Buy-Sell agreement in place – this is for you. And if you do have a Buy-Sell agreement in place – this is still for you. Half the battle of a properly structured agreement is how it’s funded.
If something triggers the agreement, like something unexpected happening to you or your partner, cash is due. You (or your partner) must pay.
More times than not, these agreements are either not funded altogether or are not adequately funded. You need a sinking fund or a plan to pay the other owner out.
So, how can you do this while ensuring business continuity for the remaining partner(s)?
Buying life insurance to fund your Buy-Sell Agreement can be the easiest, least expensive, AND most tax efficient way to do so. Your business can own the policy OR owners can own it on each other.
This option allows you to transfer the risk to an insurance company for pennies on the dollar compared to the burden it would place on business cash flow to carry the risk internally.
Fund Your Buy-Sell Agreement To Reflect The Value Of Your Business
Even with a buy-sell agreement in place, lines can be blurred if your agreement isn’t properly funded.
These blurred lines can mean headaches for your family or your departed partner’s family, lack of business continuity, or a loss of the business you worked tirelessly to build.
But, it’s not too late, here are two steps you can take now:
- Understand your most recent business value through a tool such as BizEquity, and
- Review what your Buy-Sell Agreement states
To find clarity in your next steps and ensure a fair value is exchanged, talk with an experienced planning professional at Consolidated Planning.
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Exp. 5/2027
Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.
This material contains the current opinions of Ashby Ware and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.
