Why Your Buy-Sell Agreement Might Fail Without Proper Funding
An unfunded buy-sell agreement is like a car without fuel; it exists, but it can't take you where you need to go. Here's a detailed look at potential issues:
Financial Strain: Without immediate funds, buying a partner's share might lead to burdensome loans or even forced sales of business assets.
Family Complications: The departing owner's family might inherit the business share, leading to conflicts and potential mismanagement.
Legal Disputes: Without clear funding, disagreements over the value of the departing owner's share can result in costly litigation.
Loss of Business Control: Inability to buy out a departing owner might lead to unwanted new partners, causing further discord
Disability Buyout Challenges: Failing to plan for disability buyout can lead to financial disruption and undermine the stability of the business
Impact on Employees and Clients: Uncertainty can erode trust and morale, affecting both your team and your clientele.
The Importance of Proper Funding
Avoiding these grim scenarios requires a clear funding plan for the buy-sell agreement. Proper funding ensures that cash will be on hand if an owner departs, eliminating the need for burdensome financial arrangements. The funding strategy must encompass different scenarios, including death, retirement, and disability.
Here's how funding can be approached:
Term Life Insurance:
Cost-Effective: Offers coverage for specific periods, like 10 or 20 years, at a generally lower cost.
Simple Structure: Only provides a death benefit during the term, without a cash value component.
Flexible: Fits buy-sell agreements tied to specific business timelines or milestones.
Permanent Life Insurance:
Lifetime Coverage: Offers a death benefit and a growing cash value component.
Investment Opportunity: The cash value can be a strategic investment within the business.
Stable Premiums: Fixed premiums add predictability.
Estate Planning Flexibility: After the business is sold, it can still serve as an estate planning tool, providing benefits beyond the immediate buy-sell need.
Disability Buyout Funding:
Continuity: Ensures that the remaining owners can purchase the disabled owner's share, avoiding financial disruption.
Protection: Provides financial safety against the unexpected event of disability.
Strategic Planning: Aligns with the comprehensive needs of the business, including death, retirement, and disability.
Conclusion
Navigating buy-sell agreements and ensuring proper funding demands foresight and expert guidance. The risks of an unfunded agreement can be devastating, leading to financial turmoil, legal battles, or even business collapse. Collaborating with professionals specializing in these agreements, including considerations for permanent life insurance and disability buyout funding, can be a strategic move to safeguard your business's future, providing reassurance for all involved.
Ascent Wealth Strategies provides strategies for financial/estate and/or tax planning. These strategies do not constitute tax or legal advise. Consult legal or tax professionals for specific information regarding your individual situation.
Clear Creek Financial Management, LLC dba Ascent Wealth Strategies is a Registered Investment Advisor. This blog is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Clear Creek Financial Management, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Clear Creek Financial Management, LLC unless a service agreement is in place.