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You Need A Buy-Sell Agreement

If you have a business partner, then a Buy-Sell Agreement is a Must-Have.



As human beings, we don't like to think of ourselves as mortal beings, capable of one day leaving this planet. The subject of death and dying can be quite taboo in some circles. But alas, as the great Ben Franklin once said, there are only two things certain in life: death and taxes. Have you ever paused for a moment, and considered what would happen if your business partner...or you...were to pass away? What would happen to the business? More specifically: What would happen to the partner's ownership stake in the business?

When a partner in a business passes away, and the deceased partner was married, then the ownership stake will often pass to his/her widow. This can present several challenges. For example, what if you don't get along with the spouse or have fundamental differences in how to run the company or the future of the business? Some widows have no interest in keeping the ownership stake and would rather sell it for cash. They may come to you, asking you to buy them out of the business...or they may go to a third party and sell their claim to a stranger. Or if the widow disliked the way the company was running (or disliked you), they may step into a management role and try to take the reins of control from you (or just make your life a living hell!).

To prevent these nightmare scenarios, you and your business partner need a Buy-Sell Agreement. A Buy-Sell Agreement is a legal document that exists to explain the path of succession when a business partner passes away. For example, a Buy-Sell Agreement will often say that, upon death, the surviving business partner has the legal right to purchase the ownership stake from the deceased partner's spouse (and the spouse cannot object). Or a Buy-Sell Agreement can stipulate that, upon death, the surviving partner has the legal right to seek a new business partner of his/her own choosing. This would alleviate a lot of worry, and allow the surviving partner to continue to exert control over the business they built.

So let's say that you have a Buy-Sell Agreement that allows you to purchase the ownership stake from your deceased partner's spouse within 90 days of death. That's great in theory...but where would you get the cash to do so, and in such a short time? Ask Uncle Henry for the cash? Here's a better idea: Use a life insurance policy! Life insurance policies are often used to supply the funding for the Buy-Sell Agreement. When the partner dies, the life insurance policy will provide the survivor benefit to the surviving partner, who can then use the funds to pay off the spouse. Or use the funds to hire an executive to help run the company. Or fund whatever option is given in the agreement. The agreement is only useful if the options can be paid for, and the insurance policy guarantees that the options can be practically executed on.

The take-away here is this: If you have a business partner (or several), you MUST have a Buy-Sell Agreement backed by a life insurance policy. If you do not have this in place, a) Call your attorney and have them draw up a Buy-Sell Agreement, and then b) Call your life insurance broker and have them write a life policy to back the agreement.

If you need help doing this, then that's where we come in! As your CFO, we can help connect you with an attorney and a qualified life insurance broker and get the ball rolling. If you need help determining the amount of the life policy...then no problem! We can help figure out the value of the company and what you will need to exercise the options under the Buy-Sell Agreement. Schedule a free consultation with us and let's chat!

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