Buy/Sell agreements provide for the transfer of the ownership of the business in different circumstances death, disability, retirement or disagreement. At death or disability, the remaining owners may not want to be in business with the deceased owner's heirs or the non-active disabled owner. As well, the heirs or disabled owner may not prefer to receive the value of the deceased owner's share of the business in cash. If an owner retires, an agreement paves the way for business as usual. If owners have a falling out, a buy/sell agreement will enable the business to continue or be wound's up in a orderly fashion.
Proper fundingshould be in place to ensure that money is available to buy the shares of a deceased or disabled owner, should the event occur. Life insurance provides the necessary dollars at a far lower cost than borrowing to fund a buy-out. Funding the buy-out directly from cash flow can be difficult, as the loss of the owner has probably already placed strains on the cash flow of the business. The best alternative is to be prepared with life insurance.
The goal is simple:satisfy all parties so the business can get on with business. Although a buy/sell agreement is a legal document, it still needs to be properly funded. If it isn't, an unexpected crisis could cause serious financial concerns for the business and its owners. A properly funded buy/sell agreement provides access to adequate funds to facilitate any share purchase obligations contained within the agreement.
For closely held corporations or partnerships, one of the most important tools for implementing a business succession plan is the share holders agreement or partnership agreement. Once the business succession plan is developed, an agreement can be drafted to reflect the needs and wishes of the various parties. Life insurance is generally an efficient way to fund the obligation that results from a buy/sell agreement when a shareholder or partner dies. There are numerous possible ways to structure a buyout on death and life insurance funding plays an important role in ensuring the buyout occurs.
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