Owner’s exit – good plan or “good grief!”
Q: My business partner and I bought insurance on each other years ago in case something happens to one of us. Somebody told me we need a buy-sell agreement to go along with that. If it’s just the two of us, do we have to get that formal?
A: When was the last time your sister-in-law had access to your bank account?
If the answer is “never,” you might want to re-think your affinity for informality in this instance.
The problem with good intentions is that they have a tendency of dying along with the person who had them.
It’s great that you and your business partner have life insurance on each other in case one of you dies. But if there is nothing in writing, what’s going to happen when that check comes in?
Perhaps you and your partner have discussed the matter and decided that the life insurance death benefits would be used to buy out the surviving spouse’s interest in the business.
But has anyone spoken to each spouse about this?
What if she simply said, “Sorry, but that’s not enough.”
If there’s no agreement in writing, you just have the very different opinions of the surviving owner (now doing the work of two) and the grieving widow (now wondering where her source of income is coming from).
And did I mention the kids? Odds are pretty good they’ll have an opinion, too.
A buy-sell agreement is a legally binding agreement that requires one party to buy out another under certain circumstances.
The usual triggering events addressed in a buy-sell are death, disability, divorce or departure (either by retirement or removal).
So first, you’ll need to find an experienced business lawyer to draw up an agreement that fits your circumstances.
If your business is large enough, you may need to have its value appraised by an independent business valuation firm. Sometimes this step is skipped, but think carefully before you decide to not have a valuation done. A valuation done at the time you sign your buy-sell agreement can save a lot of heart-ache later.
Finally, unless your business is sitting on a pile of cash, you probably need insurance to fund the agreement. This would probably include life and disability buy-out insurance. The last thing most businesses need at the death or other sudden departure of a key owner is a cash drain.
You can let an expert evaluate whether or not the life insurance you’ve already purchased is appropriate to fit the circumstances.
Every business owner eventually exits the business. Sometimes it is by design. Other times by default.
It’s up to you to make sure neither is a disaster.
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