Written by: Jessica Mosman
Responsible business owners should always be thinking about the future. That includes planning for the future of the business after the loss of one of the owners due to retirement, death, or disability. Having a well-planned exit strategy provides peace of mind for the current owners and a healthy future for the business. One option for this future is a Buy-Sell Agreement. This agreement is a legally binding contract-whether simple or complex that dictates the terms of a future sale of a business interest, ensuring continuity of ownership and management. It specifies the triggering circumstances (retirement, death, disability), the buyer(s), and how the business will be valued. It ensures stability in business transition and prevents heirs from having to run or sell the business after an owner dies.
There are five main ways to fund a Buy-Sell Agreement. The first three of these options include life insurance purchases for the owner(s) of the business. With a buyer in place, a life insurance policy assures that funds will be available when needed.
The first funding option is a Cross-purchase agreement. In this option, each owner buys part of the interest. Each owner buys insurance on every other owner to fund purchase.
The second method is Entity-purchase agreement. Here, the business itself buys the interest. The business buys insurance on each owner to fund the purchase.
The third method is a One-way agreement. An individual (usually a key employee) agrees to buy a sole-owner business. The buyer typically purchases life insurance on the current owner in order to fund the purchase.
The final two methods to fund a purchase are cash or personal assets (which reduces and limits liquidity) and a sinking fund (a market-driven product that could be limiting due to interest rate risk and withdrawal rate risk).
It’s never too early to plan for the future. Ultimately, business owners must consider each option and make a plan based on what approach makes the most sense for their current situation.
Financial Integrated Solutions
3010 E Old Settlers Blvd
Round Rock, TX 78665
6200 Bridge Point Parkway
Bldg IV, Suite 300
Austin, TX 78730