PLANNING AHEAD
BY : KRISTIE JOHNSTON WAYPOINT INSURANCE
Buy-sell agreements , at their heart , are a way for business owners to keep control of their business in situations where a co-owner either is unable to remain with the business or opts to leave the business voluntarily . If you were to think of a business as a “ marriage ” between shareholders or partners , this might be considered a will ( or a prenuptial agreement ). It is an agreement on how a given “ what-if ” scenario will be handled should one arise . In the case of buysell agreements , that situation is the disability or death of one of the owners . These , along with buy-sell insurance , are meant to not only govern the way that a business will remain after one of the owners departs , but also , with the help of the insurance itself , to facilitate the buyout of the shares of that departing owner .
There are a number of legally binding clauses which are included in buy-sell agreements which help with guiding business decisions . The first of these is a clause indicating who will be able to purchase the departing partner ’ s share of the business . This clause will usually include information about whether the purchase will be restricted to the other partners or if outsiders will also be allowed to make the purchase .
A second clause will include information about what events might trigger the buyout of the departing shareholder . The most common events that are going to be included in this clause are death , retirement , disability or a shareholder simply deciding to leave the company . Others can be included , but these are the ones which are encountered most often . At a minimum , death and disability need to be included in the buy-sell agreement .
A third clause will contain the price that needs to be paid for the departing shareholder ’ s interest in the company . This is primarily included in order to ensure that a fair price is provided to whichever member is leaving the company . Again , it may seem like a given to most people but when it comes down to ironing out the details in a trying time it
Buy-Sell Agreements , Insurance And You
Planning Ahead
is much better to have something already in writing to govern the situation rather than relying on winks and handshakes .
If you own a business , you know how difficult it can be to look at the larger view of the business from the top down . Sometimes it becomes easy to get lost in the day to day minutiae of running the business and you can ’ t “ see the forest for the trees ”. Regardless of the reason , there should always be a buy-sell agreement in place which can help to determine what happens should one of the owners or shareholders become unable to continue performing their duties in the company .
In addition to buy-sell agreements , there is often a need for an insurance policy . This is a policy which will pay out in the event that a buy-sell agreement is triggered and the owners need to purchase shares in the company . Without this , either the company could have to use its own assets for this purpose or the other owners would need to utilize personal funds . Neither of those two situations are ideal .
There are two primary ways in which this type of insurance can be purchased . The first would be purchasing an insurance policy for each of the owners or partners of the company . Through this , the funding for buyouts and family provisions can be made in the amounts equaling that of the interest the departing owner has in the company . The second would be for the business to purchase insurance on each owner or partner and then use the proceeds of that insurance to purchase the disabled or deceased individuals interest in the company .
Buy-sell insurance comes in two primary forms ( though there are others , should you decide that you need them ): life and disability . The differences between them mirror ( somewhat ) those of other types of life and disability insurance . Buy-sell life insurance would help provide the means for a buyout in the event of the death of one of the owners . Disability insurance , however , is meant to handle situations in the event of the disability of one of the owners . In some ways , unfortunately , a disability in one of the partners can prove to be even more detrimental to the company than a death would . This is because the remaining partners still have to take the wishes of the disabled partner into account in their decisions , but they must also pick up the additional workload . With a salary going out and no positive contributions coming in , it is in the best interest of the company ( in many cases ) for the remaining partners to buy out the disabled partner . That is what buy-sell disability insurance is meant to facilitate .
Many companies have ceased to exist upon the death or disability of one of the owners . This is not because the company cannot function without them , however . It is simply because no plan of succession was put in place ahead of time . Buy-sell agreements are the best way to avoid that situation . Perhaps most importantly , these agreements are a way of ensuring that the assets of the company or the personal funds of the other owners do not have to be used to facilitate the buy-sell agreement .
Not only do the buy-sell agreements help govern what will be done in the event one of the principle owners or partners of the company can no longer continue their role , but it also helps to provide a means of funding for the remaining members to take full control . This ensures two things : that the company will continue to function as it is and that the family members of the departing owner will be taken care of . Having a plan of succession and a means to carry out that plan is absolutely essential to the future of most businesses . +
Kristie Johnston has built her career in the finance and insurance industry for over 26 years . In 2009 she expanded her licensing to include life insurance products and now focuses exclusively on assisting clients with life and group benefits coverage . Kristie is located in Parksville but travels all over the Island to connect with clients in need of coverage . Contact her or any one of the Waypoint offices by calling 310-8442 or connect with us online at waypointinsurance . ca
FALL 2016 | 25