Many business owners may be good at running their companies, but the majority of them are failing to address essential long-term planning that is critical to sustaining their businesses.
One area the majority of business owners often neglect is planning for business continuity.
While the question of your death or disablement is not one that's fun to ponder, it makes good sense for business owners to put plans in place in case the worst happens. This is especially important now amid the COVID-19 pandemic, which has put the issue front and center for many business owners who want to ensure their company can survive should they become incapacitated or pass on.
One way to ensure your business's survival is to have a buy-sell agreement, which would prompt the sale of your company in the event that you are unable to run it any longer.
According to the "MassMutual Business Owner Perspectives Study," business owners in the survey identified these concerns:
What's a buy-sell agreement?
A buy-sell agreement, also known as a buyout agreement, is a legally binding agreement between co-owners of a business that governs the situation if a co-owner dies or is otherwise forced to leave the business, or chooses to leave the business. If the business has just one owner, then the agreement should specify who would be buying the company and continue its operation.
A buy-sell agreement should be designed to protect the business from the five Ds - death, disability, divorce, departure, and disqualification.
When properly executed, a buy-sell agreement can help ensure the continuity of the business when ownership needs to change hands for any reason. It is a legally binding agreement that requires one party to sell and another party to buy ownership interest in a business when a triggering event occurs, such as the death, disability, or retirement of an owner.
This agreement structures the method and manner in which the business will continue in the event of the owner's death.
By agreeing to buy the company, the key partner, employee or associate relieves the owner's family of the responsibility, and instead provides them with a lump-sum payment. A key employee, as opposed to the owner's family, is in a much better position to continue the business operations properly.
Funding the agreement
The majority of buy-sell agreements are funded with life insurance. In the case of a sole proprietorship, a policy covering the life of the owner is typically bought and paid for by the key employee who has agreed to purchase the business.
The employee is also the beneficiary of the policy, which has a death benefit equal to the pre-determined purchase price of the business. Upon the death of the owner, the employee would receive the proceeds of the life insurance policy, then transfer that money to the owner's heirs in exchange for all interest in and assets of the business.