Funded By Life Insurance
Buy Sell Agreements. It takes years of planning, hard work and sacrifice to build a profitable business.
If proper preparation is not made to preserve it in the event of the death of a partner or a share holder of a closely held corporation everything can fall apart.
Sometimes business people do not pay enough attention to this possible eventuality.
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Businesses That Need Buy Sell Agreements
- Buy Sell Agreements And Partnerships
For the sake of discussion let us assume there are three partners in a business each owning 1/3 of the partnership …and each has his area of proficiency. The success of the business depends on them working together to achieve their desired goals.
Partner A dies suddenly of a heart attack. Consider how he is to be replaced. It may be possible to find an experienced employee in this partners area of expertise but it will take time for that person to familiarize himself with the manner in which this company operates.
It will also take time for the new employee to adjust to his or her new bosses. Consider the widow of partner A. Will she not need some income from the business to continue raising her family?
Will the partnership be able to provide such an income for her until the survivors, partners B and C can come up with sufficient cash to buy out the deceased partners shares. If they cannot the widow of partner A may have to force a sale of the business at much less than it’s true value so that she can get her money.
Some business people assume that because they are successful that they can raise sufficient cash from their banks to purchase the deceased shares.
The odds are that the bank will be very uncomfortable because of the death of one of the partners. What about taking the money from saving. No good business person wants to do that even if they have sufficient savings…may be in a pension fund.
The ideal solution is to have a buy sell agreement drawn up before hand bearing in mind the possibility of such a situation. This agreement should be funded by life insurance as it is the cheapest way to go.
The agreement would state that the surviving partners would purchase the deceased partners shares at a predetermined price.
The widow and children would be happy with the situation as she would receive full value for her shares and so would the surviving partners because they would own the partnership in entirety.
- Buy Sell Agreements And Corporations
The use of buy sell agreements in S Corporations, C Corporations and Limited Liability Companies is similar to that of the Partnership. The corporation will own the policies and will also be beneficiary of the policies.
If shareholder A dies the proceeds would be paid to the corporation which would use the funds to purchase the the deceased shareholders stock at a predetermined price.
You can use term life insurance or a permanent policy. Many business people show preference to the 20 year term policy and the 30 year term policy. Properly prepared buy-sell agreements are vital to the survival of partnerships or corporations.
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