If you ever need to respond to your buy-sell agreement, the money will change ownership. This means you need a plan to find out where that money will come from. Sources could be cash, a declining fund, installments, or borrowing. However, many business partners believe that life insurance is the most cost-effective and efficient way to have money at your disposal when an owner leaves the business. Often, in the case of a private entity, when a shareholder dies, the private organization receives the proceeds of the insurance tax-free and uses that money to cash out the deceased`s shares. The question of which of the many different structures will be used in a buy-sell contract should address several issues, including whether it is better for the company or the individual to buy the insurance. « If you don`t have a buy-sell agreement, you could share the reins with the spouse, children, or anyone else of a former partner who knows little about your business and isn`t as invested in its success as you are, » says John Muth, director of Advanced Planning at Northwestern Mutual. « But this scenario often happens, either because trading partners have never made or financed a deal, or because the ones they have are obsolete. » If properly written and approved by all parties, it will avoid many potential conflicts between shareholders on the street. Therefore, although a legal document has been drawn up stipulating that the remaining shareholders will buy the shares of the outgoing owner, it is likely that the entire agreement will collapse if there is no financing agreement.
Consider these options to fund a buy-sell deal: If your ideal scenario is the last option, you will definitely need a shareholders` agreement to determine who will buy the shares, what the purchase price will be, and all other selling conditions. A properly crafted life insurance agreement will help reduce taxes, create a buyer and a guaranteed market for all the hard-earned equity you`ve invested in your business over the years. . . .