Small Business Financial Article
|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
Protect Your Business and Your Family with a Business Continuation Plan
Business owners concerned with the continuity of their business in the event of their death should have a business continuation plan in place. Without such a plan, there is a greater chance the business will not be able to continue as the owner envisioned. At the death of a business owner, in addition to the need for a succession plan, there is typically a need for capital in order to pay estate settlement costs and personal liabilities. If the surviving family finds itself lacking in liquidity, it may be forced to sell the business at a fire sale price. Business owners should have sufficient life insurance in place for such contingencies.
It can get more complicated if there are additional owners, partners or stakeholders. The death of a partner or major stockholder can be devastating for a business if there isn’t capital available to purchase the deceased partners’ interest from the surviving family. The surviving family could initiate a claim on business assets which could result in a forced liquidation. Worse (in many cases), the surviving business owners could wind up having the surviving spouse as a business partner.
Fully Funded Buy-Sell Agreement
As part of an overall succession and continuity plan, businesses with multiple owners should have a written business continuation agreement (buy-sell agreement) that specifies a formula for valuing each partner’s equity portion along with specific terms for purchasing their interests. To ensure that funding is available when it is needed, the agreement should mandate that life insurance be purchased on the life of each partner. Depending on the number of owners, the life insurance can be purchased by each partner on the life of the others (cross purchase agreement); or, the business itself can purchase and own the life insurance on each owner (entity plan).
Buy-sell arrangements are a simple, yet effective way for business owners of privately held companies to plan for the orderly transfer of business interests where two or more owners are actively involved in the business. In addition to securing the needs of the surviving family members and ensuring the continuation of the business, a buy-sell arrangement also ensures each owner that there is a buyer for their business interest at a fair price.
Business succession planning involves legal, tax and personal financial issues. Guidance from a qualified attorney or tax professional is strongly recommended.
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