The success of a business requires strategic planning and the fatality of an owner or partner can be an uncertain time for the business. If a company has more than one owner a buy-sell agreement establishes the smoothest transition in ownership to the surviving owners. A buy-sell agreement should be created by a licensed attorney who has experience in this particular line of law. If properly implemented the buy-sell agreement protects surviving partner(s) from fighting with the decedent partner’s beneficiary(s) which is typically the widowed spouse.
From multi-billion-dollar corporations to small businesses, the death of an owner can devastate a company. Without a buy-sell agreement, the beneficiaries of the deceased owner’s estate will inherit those shares of the business which can create an enormous problem for the surviving partners. Important decisions about how to run the company could be adversely affected by someone who does not have the experience or capability. Furthermore, certain licenses might be required to run the business. For example, a small medical practice with three partners, the spouse of the decedent is usually not a doctor and would not be able to step into the business.
A buy-sell agreement allows the beneficiary(s) of the deceased to turn their inherited business interests into cash. By planning ahead with a buy-sell agreement, owners can avoid unnecessary hardship on business partners and beneficiaries. Implementing a buy-sell agreement only partially protects the business because the surviving owners must have the funds available to purchase the deceased owner’s portion. In short, there needs to be a sizable amount of liquid cash.
There are numerous ways to fund a buy-sell agreement but life insurance is generally the most cost-effective way to create a large pool of money for pennies on the dollar. The opportunity cost of putting money aside into a sinking fund is often times overshadowed by what the business can do with that capital to grow the company. After crunching the numbers most business owners agree that purchasing a term life insurance policy on each of the owners is the smartest decision when it comes to funding the buy-sell agreement.