As a business owner, you know it’s important to plan for the future of your business. But the future can be unpredictable. A buy-sell agreement can help you protect your business from the unexpected.
A buy-sell plan is a legally binding agreement between business owners that outlines what will happen should one of the owners of your business die unexpectedly. It addresses items such as how the business should be valued and how surviving owners might buy out the interest of the company.
With a buy-sell agreement, you can:
- Make sure your loved ones are provided for
- Ensure the business continues to operate in an orderly fashion
- Determine a fair price at which you all agree to sell your business interests
- Ensure a secure future for your business and employees
How does a buy-sell protection plan work? The plan is a legal agreement between owners of a company that states what happens should an owner die, including:
- How the value of each owner’s business interests is calculated
- Whether it is the intent of any owner to sell their interest to the remaining owner(s) at their death
- Whether it is the intent of the remaining owner(s) to purchase the deceased’s business interest
Where does life insurance tie in?
Should an owner die unexpectedly, a life insurance policy can provide the necessary funding to purchase the deceased’s business interests. There are two ways to fund a buy-sell agreement with life insurance:
Cross purchase buy-sell protection plan
- You and your co-owners purchase a life insurance policy on each other
- Each of you is the owner and beneficiary of the policy on the other owner(s)
- If one of you dies, each surviving owner receives tax-free insurance proceeds to purchase the deceased owner’s interest
Stock redemption/entity purchase buy-sell protection plan
- The business purchases a life insurance policy on each owner
- The business is owner and beneficiary of each policy
- If one of you dies, the business receives tax-free insurance proceeds to purchase the deceased owner’s interest
