Navarinou 10, 1100, Ayios Andreas, Nicosia

savvas@insurancelinkcyprus.com

         

70 08 88 83

A buy sell agreement without funding is worth as much as the paper written on it

Buy-Sell Agreements Funding

Buy-Sell Agreements Funding

A buy/sell agreement, also known as a buy/out agreement, is a binding agreement between co-owners of a business that governs what happens if a co-owner dies, suffers a long-term disability, or retires. It may be thought of as a sort of premarital agreement between business partners or shareholders. Sometimes called a business will.

Many times, in a closely held business, it is difficult to sell the shares of an absent owner to the other owners. It is also difficult to determine what the value of such shares is, especially if you are no longer here to help determine what the value is. It is also difficult for a business to support the same way as before a partner in a wheelchair.

In order to be fair with all parties involved the best way is to draught a buy/sell agreement outlining what should be done in each of all these cases tailored to the business. For example, if one of the owners is disabled and not able to work in the business, how the other owner should buy out his interest, or if an owner dies, it is important to outline how the remaining owner buy out the interest of the deceased owner, and in what price.

In summary, a buy/sell agreement serves as a roadmap for the company, upon triggering certain events, to guide the remaining owners to buy all the shares and to continue the business.

Savvas P. Christoforou

CLU FLMI MBA LUTCF

Chartered Insurer

It may be thought of as a sort of premarital agreement between business partners/shareholders or is sometimes called a business will

Funded Business Buy Sell Agreements portrait photo

Benefits Of A Buy-Sell Agreement

  1. Establishes a valuation of a deceased or disabled owner’s interest in the business for estate tax purposes
  2. Establishes a mutually agreeable price and terms, to reduce future potential litigation and friction
  3. Helps facilitate a smooth transition of management
  4. Ensures the family of the deceased owner receives cash instead of unmarketable stock

Buy/Sell Agreement Clauses:

A buy/sell agreement consists of several legally binding clauses and controls the following three business decisions (B.E.P.):

  1. Who can Buy a departing partner’s or shareholder’s share of the business (this may include outsiders or be limited to other partners/shareholders)?
  2. What Events will trigger a buyout? (the most common events that trigger a buyout are, death, disability, retirement, or an owner leaving the company).
  3. What Price will be paid for a partner’s or shareholder’s interest in the partnership and so on?

Funding the Buy/Sell Agreement

A buy/sell agreement without funding worth’s nothing if the business does not have the money to conclude the transfer of the business to the surviving partner. The Buy/Sell agreement is often linked to a Life insurance policy on each owner’s life, where the trigger event is insurable. The Life Insurance policy provides the surviving owners with the money to buy out the departing owner’s interest.

Linking a Buy/Sell agreement with life insurance is the most cost effective way of funding the agreement, and it’s recommended by business succession specialists and financial planners to ensure the buy/sell arrangement is well-funded and to guarantee there will be money when the buy/sell event is triggered.

Savvas P. Christoforou

CLU FLMI MBA LUTCF

Chartered Insurer

… a buy/sell agreement without funding to conclude the transfer of the business to the remaining partner is like a car without engine

Why is Life insurance needed in a buy/sell agreement?

Death, total and permanent disability or traumatic illness can have a dramatic effect on a business. Some of the problems that can occur are:

  • the terminating business owner estate, may make demands on the business for it to be wound up, to be paid out for his or her interest in the business, or for repayment of loan account balances,
  • in the case of death, the estate may insist on immediate and direct involvement in the control and operation of the business, but may not have the expertise to handle this,
  • in the case of death, the estate of the deceased business owner may be forced by circumstances to sell his or her interest in the business to an outside buyer at liquidation sale values,
  • in the case of traumatic illness (e.g. heart attack), or disability to work, there may be uncertainty over the likelihood of the business owner recovering or ever returning to work,
  • the continuing business owners may end up doing all the work but splitting the profits with a non-working owner.

Which are available Insurance policy ownership structures?

  1. Cross-Purchase ownership
  2. Self-ownership of policy on own life
  3. Trustee of discretionary trust ownership
  4. Business ownership of the life policy
Funded Business Buy Sell Agreements

The most appropriate means of owning a life policy in any buy/sell arrangement depends on, the type of Insurance plan, who the parties are and the circumstances of those parties to the arrangement. Each approach to ownership has its advantages and disadvantages. Since “one size doesn’t fit all”, we will assist you to review each case on its own merits.

If you are one of several owners in a limited liability company, or one of the partners in a partnership, is a very good idea enter into a funded buy/sell agreement with your partners, that will allow your interest to be bought out by other owners in the business if you die or are incapacitated or retire.

We can work with your existing Accountant and Solicitor in providing a suitable Business Continuation Plan for your business, or we can recommend some of our associates. For more information regarding Business Succession planning please fill out the form below.

I am interested
RSS
Follow by Email
Facebook
Twitter
LinkedIn
Share