Why Business Partners Should Have a Buy/Sell Agreement
Aug 26 2020
Have you ever heard stories about family farms ending up in the wrong hands due to a death in the family or an owner choosing to leave the agriculture industry? We have. Nothing is worse than being forced to do business with a stranger and having no way out other than an expensive buy out. So how do you avoid that? How do you prepare for changes in the ownership of your agri-business?
With a buy sell agreement that is funded by life insurance.
A buy sell agreement is a legally binding contract between multiple owners of a business. You may also hear it referred to as a buyout agreement. This contract lays out the plans for situations where an owner passes away, files bankruptcy, chooses to leave the business, and more. It dictates what happens to that person’s portion of the company.
When you fund a buy sell agreement with life insurance, the company or individual owners would buy life insurance policies on the lives of each owner. There are two main types of buy sell agreements to look at when funding by life insurance. They are a cross purchase plan and an entity purchase or stock redemption plan.
A cross purchase plan is where each business owner purchases a life insurance policy on each of the other owners. Then, when an owner passes away, the remaining owners will use the payout from the life insurance policy to purchase the deceased owner’s share of the business.
An entity purchases or stock redemption plan is where each owner enters into an agreement with the business to sell, they interest in the business. The business will purchase the life insurance policies on each owner and pay the premiums. When an owner passes away, the business with then use the life insurance payout to purchase that owner’s share of the business from the estate or heir, depending on where the share of the business passed to when the owner passed away.
Let us look at an example:
A couple owns a farm. They have two sons. Both sons get married and are given their own portion of the farm. So now the farm is owned by all three couples equally. Unfortunately, the older son passes away and his wife is left with his share of the farm. Years later, she remarries. Now the farm is owned by the father and his son, as well as the widow and her new husband. If she were to pass away, the farm would be owned by the father and his son, and the new husband.
If the father and his sons had a buy sell agreement, they could have purchased the older son’s share of the farm from his widow and avoided the situation. If it were funded by life insurance, they would be able to use the life insurance benefits to do so. Otherwise, they would need to hope that the widow or her new husband would be willing to sell their share of the farm for a decent price and hope they had the money.
No matter what type of business you are in or who you are in business with, you should have a buy sell agreement. You never know what will happen, and this type of agreement helps to prevent any issues in the future. By funding that agreement with life insurance, you can be sure that in the event of a death, you will have the funding to fulfill the agreement.
When creating your buy sell agreement, be sure to work with an attorney and CPA to ensure that all parties are aware of their value in the company and agree on the contract. When it comes to funding that agreement with life insurance, contact your independent agent to make sure that you are covered for your needs. Call us today at 877-466-9089 and let us help you fund your buy sell agreement today!