Extending The Life Of Your Business

by Joel Houser, Life Sales Consultant

In this day and age, small businesses are everywhere. They represent 99.9 percent of all employer firms and employ just over half of all the private sector employees.1 In the insurance and financial services industries, the majority of independent advisors operate their own businesses. Given these facts, it’s likely that you and/or some of your clients fall into this entrepreneurial group. Whether we’re talking about large companies or small family-operated businesses, these organizations all rely on smart strategy and planning in order to be successful.

As you look ahead to the future, do you have a secure strategy in place for ensuring the continuation of your business? It’s important to protect your hard work, just as you would protect the hard work of your clients. If you are still considering what the future of your business might bring, it’s time to take a look at solutions that can help ensure all the effort and money you’ve invested don’t disappear in case the unexpected happens.

A buy-sell agreement

The death of a business owner or partner can be an uncertain time for the life of any business. If tragedy were to strike tomorrow, are you confident that your business would continue and thrive as you’re intending? Furthermore, will your family members be prepared to take over, or will they have the opportunity to turn the business into money upon your death if they prefer?

A properly drafted and implemented buy-sell agreement can help ensure that the plan you have in mind comes to fruition and that unintended transfers of ownership don’t occur. It may allow your heirs to turn inherited business shares into cash. Additionally, it may help surviving family members or your co-owners fund the transfer of ownership of the business. By purchasing a life insurance policy to fund a buy-sell agreement, you can help protect and extend the life of your business.

Protection for those who matter most

From your independently-owned modest family operation to multi-owner corporations, a properly drafted buy-sell agreement allows for a smooth transition in ownership to the surviving owners. Without a buy-sell agreement, your heirs or those of the deceased co-owner will inherit those shares of your company. They can then sell their shares of the business to anyone—which could force important decisions about how your company is run to be made by people who don’t have what you consider the best interests at heart. Is it possible that your heirs don’t want to be a part of the business when you’re gone? A buy-sell agreement would allow the family of the deceased to turn their inherited interest in the business into cash—freeing them from the burden of taking on an ownership role. By planning ahead with a buy-sell agreement, you can avoid unnecessary hardship on both family and colleagues while helping the business succeed in the future without lengthy probate court or lawsuits.

The benefit of funding with life insurance

Creating a buy-sell agreement alone only partially protects a business. For complete protection, the surviving owners must have the funds available to buy the deceased’s portion of the business back from the heirs. This may mean borrowing the funds at expensive interest rates or liquidating business capital still needed by the business, both of which could create a negative impact. Sometimes surviving owners might even be forced to use their personal property, such as homes and cars, as collateral on a private loan. Ultimately, if none of these risky options work, the heirs of the deceased are left with shares in a business they don’t want rather than an inheritance.

There are several methods to fund a buy-sell agreement, but coming up with the cash may not be possible. Life insurance is a cost-efficient, relatively simple way to do this, and the funding may not only be guaranteed but is typically tax-free.

Putting the strategy to work

When structuring a buy-sell agreement, you must identify who will be doing the buying upon a triggering event (death, disability or retirement). Typically, either the company itself will do the buying, which we call an entity purchase, or the owners will be buying, referred to as a cross-purchase agreement.

Using either method, each owner must first sign a Buy-Sell Agreement legal contract prepared by a lawyer. With an entity purchase, the company agrees to do the buying. To fund this obligation, the company buys a policy on the life of each owner and serves as the beneficiary of the policies. Upon one partner’s death, the company uses the life insurance proceeds to purchase the deceased’s interest in the company. Conversely, in a cross-purchase agreement, each owner pays for and is the beneficiary of life insurance on the other owners’ lives. Upon the death of an owner, the surviving owner(s) receives the life insurance death benefit payment and uses that money to buy the shares of the business now belonging to the deceased’s heirs.

There are advantages and disadvantages to each approach above, depending on the unique situation of your business. A lawyer can help determine which arrangement is best and help you draft a proper buy-sell agreement. In addition to considering this solution to protecting your business, show clients how life insurance can help them protect their life’s work. Call your Life Sales Consultant today for more information on buy-sell agreements, sample documents, referral to a qualified attorney that can help with the design and, of course, product information to fund the transaction.

FOR AGENT USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC. 11648 – 2011/4/19

1 Guarantees provided by life insurance are subject to the claims paying ability of the issuing insurance company. Agents may not give tax, legal, accounting or investment advice. Individuals should consult with a professional specializing in these areas regarding the applicability of this information to his/her situation.