Protect Your Small Business with Buy-Sell Agreements and Life Insurance

Buy-Sell Agreements

Small business partners are often so focused on running their day to day operations and acquiring new business that they forget to plan for the future. But having a succession plan is the key to a healthy long-term future for any small business, and is invaluable in the event that one of the partners wants to leave the business, becomes incapacitated, or dies. 

Two elements of a succession plan that can help protect the future of the business and the remaining partners are buy-sell agreements and life insurance.

Buy-sell agreements

If you have partners, you should have a buy-sell agreement. A buy-sell agreement is a contract between you and your partners that determines how (or if) the business will operate if one of the partners retires, wants to leave the business, becomes disabled, or dies. 

Buy-sell agreements can establish a way to calculate the sales price for the business or for each owner’s share of the business. This can help to avoid disagreements that can arise at the time that one partner leaves the business—especially if the reason for leaving is one which could cause financial strain. 

The buy-sell agreement can also include instructions or guidelines about succession of the ownership and management interests in the business. In other words, the buy-sell agreement can establish whether each partner’s share will be passed on to their heirs, purchased by the other partners, or sold to third parties inside or outside of the business. 

There may be certain companies or individuals that the partners do not wish to be involved in the business. For example, you and your partners may want to ensure that, if one of your partners gets divorced, the divorced partner’s ex-spouse cannot get a share of the business in the divorce. The buy-sell agreement can specifically prohibit the transfer of shares or ownership interest in the business to specific people or companies.

Life Insurance

As a small business owner, you should consider including a term life insurance policy in your estate and succession plan to benefit your spouse or children who may suddenly find themselves without an income to support them because of your death. 

In addition, in small businesses, the partners often purchase life insurance policies on one another. Doing so can provide your partners with the funds to buy out your interest from your estate in the event of your death, ensuring that they can continue to operate the business and that your estate and heirs get a fair price for your share of the business. This can be accomplished through an irrevocable life insurance trust which keeps the insurance proceeds out of your taxable estate, giving your surviving partners tax-free funds to purchase your interest. 

Since these life insurance policies are made for the benefit of the business, premiums can be paid by the business as a business expense, rather than by the partners individually.

It is important to consult with a lawyer when developing your business succession plan for these reasons and more. Find the perfect small business lawyer to help you and your partners develop a succession plan that works for you and your business by posting a short summary of your legal needs on our site.

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Posted - 03/21/2018