This insurance is for you if:
- you are a co-owner of your business.
- you want to protect your business if you or your
business partner can no longer help run the business.
- you’re a fan of having peace of mind.
Ensuring the longevity of your business is a key (and often overlooked) component of any business owners’ financial plan. As a business owner, you need to think about the disruption which could be caused by disability, retirement, bankruptcy, divorce or death of one of the business owners / shareholders of your business. Having a buy-sell agreement can address these issues in advance of them happening, however; a buy-sell agreement is only as good as the funding arrangement in place. In fact, having a buy-sell agreement without the proper funding mechanisms can actually have the opposite effect of what was intended, leading to the collapse of the business.
What is a Buy-Sell Agreement?
When you have a business with more than one owner, it's a good idea to plan for the possibility of losing an owner’s services, whether due to illness, disability or death. If you'd like the surviving owner to purchase the business interest of the departing owner, consider drafting a buy-sell agreement.
This agreement sets out the terms and conditions relating to how an active owner will take over a departing owner’s interest in the business. Once this is complete, you can then have a look at your options for financing the agreement.
Structuring a Buy-Sell Agreement
A buy-sell agreement can be funded with any combination of Life, Disability or Critical Illness insurance. Your Valley First Life & Disability Specialist, your accountant and your lawyer will assist you in determining the funding method that suits your operation.
Work with your business partner to plan your financing of the buy-sell agreement ahead of time to avoid these drawbacks:
Lenders see increased risk when a business loses an owner, so borrowed funds may be difficult to obtain. Also, the loan is repaid with after-tax dollars.
Using surplus corporate cash
Using these funds weakens the cash position at a time when the loss of an owner may already strain the cash flow. This option may also limit business growth.
Assets of significant dollar value are typically critical to the operation. Also, liquidating assets costs time and money, and a forced sale may result in selling below value.
Benefits of Funding with Insurance
When funding a buy-sell agreement in the event of an owner’s death, the preferred method is typically life insurance:
- Annual premiums are cost-effective
- Proceeds are tax-free
- Death benefit amount is guaranteed
- Payment is received exactly when needed
Disability insurance funds a buy-sell agreement in the event of sickness or injury preventing an owner from working.
Critical Illness insurance funds an agreement if an owner suffers a covered illness or condition such as cancer, heart attack or stroke.
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