I love talking to business owners! The pride you see in their eyes of how hard they’ve worked on their business to get it to the success it is today. It’s their baby – they won’t let anyone take it from them or their partner.
Until a partner is unexpectedly lost to death or illness, now in comes the partner’s spouse ready to run the business with you. The only problem, up until now the silent spouse was never interested in the business. Now, they offer an opinion on everything from how to the business operates to the colour of paint in the office.
Let’s assume you and your business partner own the company 50/50, and fair market value of the business is $2M. Both of you have a spouse who would inherit your portion of the company shares if you were unable to continue working.
Most people who start a business have tried at some point to implement a shareholders agreement or buy / sell agreement with their partners, should the unexpected happen. It is basically a road map for the shares of the business should a partner not be able to continue working due to death, disability, or illness, at a set purchase price. Completing a signed off agreement that both partners are happy with is an accomplishment in itself. But you have only rounded second base. You’re not home free yet.
What most business owners don’t consider is, “how is the buy / sell agreement funded?”
Could you write a check today to buy out half of the shares of your business? Most people don’t have room in their budget to fit in a second mortgage (without impacting your lifestyle expenses).
How to Finance a Buy / Sell Agreement
Arrange to fund the buy / sell agreement with insurance. This way, your company pays the premium (i.e. life insurance) and if your business partner were to pass, there would be an immediate shotgun clause described in your shareholders agreement. Your deceased partner’s spouse would inherit the business shares, but immediately, the shares would be redeemed and sold to you. The funding to purchase the shares comes from the tax free, lump sum death benefit from the life insurance. Now, your partner’s wishes of their spouse getting their share is met, you are 100% owner of your company, you retain control of the company and you’ve avoided having to take a second mortgage to buy out the shares.
Another Benefit of Funding a Buy Sell Agreement
For how long would you continue to pay your partners income if they weren’t able to continue working due to disability or sickness? You can fund the buy sell agreement with disability and critical illness insurance too.
Proper Financial Planning is Key to a Buy / Sell Agreement
There are a number of different designs and insurance options to consider. Work with an experienced Certified Financial Planner who specializes in servicing business owner clients. At Elementus Wealth Management, financial planning for business owners is our focus. Call Jeff at (604) 681-4493 or jeff@elementuswealth.com to learn more about your financial planning options to protect you, your family and your business.