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SubscribeDiscussing your businesses’ legacy can be a tough conversation. But making sure your business has a clear plan to carry on is vital to ensuring that your business partners and, potentially, your family are not left in a bind.
Business legacy and perpetuation planning can help provide framework to the big questions that business owners face as you consider how your business would survive without you:
What would happen to your business if something unexpected happened to you or one your business partners?
Is it clear who would own your business after the death of a business partner? Would your partner’s spouse or another family member become a shareholder or owner? Is this what all the business partners have in mind when they picture the business’ future?
To help business partners get on the same page and determine your joint vision for your business’ future, you first need a legal agreement that sets the terms for the transfer of ownership upon the death or disability of a business partner. This agreement is usually called a buy-sell agreement.
For a heating and cooling company owned by two brothers, the buy-sell agreement stated that one of them would own the company outright in the case of a death or a disability. When one of the brothers passed away unexpectedly, the terms of the agreement allowed the living brother to buy all of the shares and leave the company debt-free because they had the proper insurance.
How will you fund the obligations of your legal perpetuation agreement?
For the agreement to be successful, funds must be available to carry out the terms of the buy-sell. Without a funding plan in place, the buyer(s) of the deceased person’s shares — usually the surviving business partner(s) — may be forced to sell assets, take out loans or even file for bankruptcy. Having an insurance policy in place that helps fund the buy-out can provide significant peace of mind to surviving business owners and family members of the deceased partner.
Let’s look at another real life example. Three friends opened a craft brewery. For the first couple of years they operated without a buy-sell agreement until one of the business partners got married. At that time, they sat down with their attorney and drafted an agreement that set the terms of how ownership would transfer upon the sudden death or disability of one of the partners.
In their agreement, they determined that the surviving two business partners would buy out the shares of the deceased partner. At the time, the brewery was valued at $3 million. If one of the business partners were to die, the other two owners would need to come up with $1 million to buy the deceased partner’s shares, but the business nor the partners individually, are likely to have enough available funds to fulfill the obligation in the case of an unexpected event. To meet the financial commitment, the brewery purchased life insurance policies for each partner. The brewery pays the premiums and is the beneficiary of the policy. If a partner dies, then the brewery and the surviving partners can use the policy benefit to buy the shares of the deceased partner.
How do you value your business for a buy-out that could happen at any time or well into the future?
Some buy-sell agreements require a third-party valuation of the company. No matter what kind of valuation is determined, it’s important that the business be valued on a regular basis so that agreements and policies can be updated to fund the full value of shares. In the case of the brewery example above, two years after the initial legal agreement and policies were written, the partners did a major expansion to the brewery valued at $500,000. The partners’ life insurance policy limits were subsequently updated to reflect the new valuation of the business.
How to determine the best funding plan for your legal agreement?
There are several options to funding buy-sell agreements depending on your type of business, ownership structure, and your plans and wishes for your business’ future. Legal, financial and insurance specialists experienced in perpetuation planning should be consulted to determine the best solution for your individual business. Here is how a current client described the process, “We worked together with our MMA team on how to structure the insurance necessary to match our legal agreements. They worked in conjunction with our estate planning and business succession planning attorney to make sure benefits would come into our business in the most tax efficient manner.”
MMA Business Perpetuation Planning
We offer business perpetuation planning specializing in small to medium-sized businesses across all industries. Led by certified financial and insurance experts, we provide clarity for businesses that are privately held and owned by two or more partners. We offer clients solutions to help ensure the long-term success of your business, including:
Our Expertise
Shaun McChesney leads MMA’s Business Perpetuation Planning services and has helped countless business owners — from start-ups to multi-generation businesses — ensure that their life’s work can survive and thrive into the future. Shaun has three decades of experience as a certified exit planning advisor, holding designations as a Chartered Financial Consultant, Chartered Life Underwriter and a Life Underwriter Training Council Fellow.
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