What happens to your company if you suffer through the death of an owner? Can the company survive? Is there a strategy for a smooth transition or would the company face disruption, possibly needing to sell assets to compensate the heirs? Could the heirs become new part-owners? In addition to company survival, most owners seek personal assurance that their families will be financially secure and properly compensated in the event of unforeseen circumstances. There needs to be a plan in place. Like most good plans it needs to answer Three basic questions: “What?”, “How?” & “When”
The “What” is a buy-sell agreement. This is a contract among the business owners. If one owner dies, the remaining owners, or the company itself, must buy the deceased owner’s share based on the contract terms. The deceased owner’s heirs must also sell their inherited share at the agreed-upon price.
The “How” focuses on the funding of the plan. Funding options vary, some riskier than others. Following are the four basic options for funding a buy-sell agreement:
- Cash can be put aside to compensate surviving relatives. Will it be adequate? Will putting cash aside inhibit the business from growing to its capacity?
- The business could seek a loan to compensate heirs for the deceased owner’s share. This could impact the company’s borrowing capacity needed to fund business activities. There are also interest costs to consider.
- The selling off of assets, which could lead to the dismantling of the entire organization.
- The best way to fund a buy-sell agreement is with life insurance. This ensures immediate funds upon a death, with tax-free death benefit proceeds. Buying the deceased partner’s share becomes affordable, and premiums are likely much lower than loan interest.
The “When” should be obvious. Since the death of an owner can occur without warning, and at the most inopportune time, the “When” is NOW.
The Life Insurance Safe Zone offers a comprehensive “Succession Plan Plus,” which covers the “How”. Now, you may ask yourself; “what happens if none of the owners die? Do we lose the money we put into the plan?” That question is answered by the “Plus” in the “Succession Plan Plus.”
Please contact the Life Insurance Safe Zone for complete details and a free evaluation.
See HTTPS://SuccessionPlanPlus.com for more details, including details on the “Plus.”