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R&R Insurance Blog

Four Ways to Fund a Buy-Sell Plan

Posted by Pat Driscoll

Business-Owner-Buy-Sell-Plans.jpgIf you retired, died, or became disabled yesterday, who would own and manage your business today? Would you want your business interest retained for a family, sold, or liquidated? According to The Virtual Assistant, there are four ways to fund a buy-sell plan at an owner's death:

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 a 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.

Click here to learn more about the Buy-Sell services provided by R&R Insurance Services.

Topics: buy-sell agreement, funding buy-sell agreements, Buy-Sell Agreements

4 Factors to Consider When Creating a Buy-Sell Agreement

Posted by Tom Driscoll

Buy Sell Agreement Diagram_SmallIf you retired, died, or became disabled today, who would own and manage your business tomorrow? Would you want your business interest retained for a family, sold, or liquidated?

A Buy-Sell Agreement controls what happens to the company stock upon the occurrence of a triggering event such as the death, retirement, or disability of a shareholder. A Buy-Sell Agreement, which is a contractual agreement between shareholders and their corporation or between a shareholder and the other shareholders of the corporation, is the center of a business continuation plan.

There are 4 key factors to consider when creating a buy-sell agreement with your stockholders:

  1. Type of Business (S-Corp, C-Corp, LLC, Partnership, Sole-Proprietorship)
    A properly funded Buy-Sell Agreement uses life insurance as a funding vehicle to pay the deceased/disabled business owner's family their share of the business interest. Who owns this policy depends on how many business partners you have and what type of corporation you have (S-Corp, C-Corp, LLC, Partnership, Sole-Proprietorship). Setting this up incorrectly can result in additional tax issues, step-up in basis issues and can even result in the need to liquidate the business immediately whether you want to or not.
  2. Type of Agreement - Cross Purchase vs. Entity Purchase
    In a Cross Purchase Agreement, each shareholder owns the life insurance on each other shareholder. In an Entity Purchase Agreement – the life insurance funding vehicle is owned by corporation.
  3. Value of Your Business
    Your business’ value is extremely important when establishing a Buy-Sell Agreement. This value should be reviewed every 3-5 years to ensure your family receives the correct amount for your interest in the business. In today’s changing economy, it is important to review your current Buy-Sell Agreement regularly to ensure it is aligned with the value of your business.
  4. Funding of Buy-Sell Agreements
    Most businesses don’t have enough excess cash in reserve to buy out a shareholder's spouse upon a unfortuneate demise. The life insurance is earmarked to pay (buy out) a deceased business owner’s business interest, with the funds going to the family. Purchasing life insurance can be a relatively inexpensive way to fund your Buy-Sell Agreement. Knowing that the funds are available when the circumstance arises, reduces anxiety about a family's livelihood and guarantees the proper payout for a spouse.

Any business owner who hasn't had a proper valuation on their business is leaving the fate of the business and the livelihood of their family to chance. R&R offers free business valuation plans as a complimentary service to any business owner wanting more information about their business and how to ensure it’s longevity, and adequate funds for their family’s well-being. The service is provided by attorney resources R&R contracts with – again at no charge to you. Wisconsin businesses should contact Tom Driscoll for more information about business valuation, Buy-Sell Agreements and estate planning.

Topics: Life Insurance, Business Continuation, life insurance vehicle, buy-sell agreement, Buy-Sell Agreements, Financial Services, funding buy-sell agreements, tom driscoll, sharholder stock, Cross Purchase Agreement, Entity Purchase Agreement