There are so many "what-if's" in business and life, you can never predict when you or a partner may be forced to leave a business. Completing a business continuity plan is critical to ensuring your company remains strong and family is protected in spite of either your or a partner's planned or unplanned exit.
A buy-sell agreement backed by life insurance is a key element of a business continuity plan. If an unplanned exit occurs, the policy holder has the ability to use the proceeds from the payout to purchase the shares of the owner who retires, expires or becomes disabled. When you decide to retire, the policies cash value can be used to provide a down payment to help fund buyout of your shares. The policy can also be a good source of emergency cash as loans and withdrawals can often be taken; however, you should work with your insurance agent and CPA to understand the tax ramifications and impact on the death benefit.
A buy-sell agreement should be updated at least annually. The value of the businesses will likely change over time; therefore, the agreement will need to reflect an accurate buyout price. You will also need to adjust the life insurance policy to match the buyout value as well to make sure you are always fully protected.
Besides life insurance, there are other methods of funding a buy-sell agreement. You could use funds from working capital; however, working capital would be considered after-tax income and non-deductable. There is also the issue of needing working capital to manage the business. You could also borrow capital from a bank; however, securing a loan takes time and you will end up paying interest on top of the principle. Some firms self-insure where the partners pay into a fund with after-tax dollars. This can be an issue in early years as it takes time to build the funds necessary to cover the buyout.
Life insurance is often the best alternative to fund a buy-sell agreement. Some of the advantages of life insurance are:
- Cash is available almost immediately, when it is needed.
- Oftentimes, the settlement is greater than what is needed for the buyout and can be used to support the family.
- Death benefits are for the most part tax free. Consult your insurance agent and CPA for tax rules regarding your policy.
- The buyout does not impact business cash flow.
- The policy can be used for other emergency purposes.
For more information, contact me for dates and times, then attend one of my seminars on "Exit Planning: Protect Your Greatest Investment -- Your Business."
For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at eric@buysellswflbiz.com or 239-405-8818. Also, visit our Florida Business Exchange website at www.fbxbrokers.com and my personal website at www.buysellflbiz.com.
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