If you are a business owner, the business you’ve built is your pride and joy, and most likely your source of income. So it’s critical to think about the future of your business—one that doesn’t include you.
You might think that if you die, your family could maintain their income by running the business themselves or by hiring someone to handle the day-to-day management. The fact is, your loved ones may not have the skills or the desire for the job, and your co-owners may not welcome the idea of an unintended partner.
That’s why a buy-sell agreement is important to consider. This is a legal agreement among owners to buy a deceased owner’s share of the business at a previously agreed upon price.
There are four ways to fund a buy-sell plan at an owner’s death. They include:
1. Cash method: The purchaser(s) could accumulate sufficient cash to buy the business interest at the owner’s death. Unfortunately, it could take many years to save the necessary funds, while the full amount may be needed in just a few months or years.
2. Installment method: The purchase price could be paid in installments after the owner’s death. For the purchaser(s), this could mean a drain on business income for years. In addition, payments to the surviving family would be dependent on future business performance after the owner’s death.
3. Loan method: Assuming that the new owner(s) could obtain a business loan, borrowing the purchase price requires that future business income be used to repay the loan PLUS interest.
4. Insured method: Only life insurance can guarantee that the cash needed to complete the sale will be available exactly when needed at the owner’s death, assuming that the business has been accurately valued.
With a properly structured buy-sell agreement funded with life insurance, your business partners won’t have to scramble to come up with the money to buy out your share of the business and you’ll be guaranteed that your survivors will be compensated fairly and promptly.
This issue is important enough that you should talk to your advisor today about how you can start the process to implement this important strategy.