Buy-Sell Agreements
In the unfortunate event that your business partner dies or becomes unable to work because of a disability, having a buy-sell agreement in place allows for the continuity of your business, on your terms. By spelling out details (like who buys what for how much), it protects you from potential conflicts and allows for a smooth business transition.
Life insurance Is the most cost-efficient way to fund the agreement.
Using life insurance to fund the buy-sell agreement guarantees that you’ll have the money to buy out the ownership shares of the deceased partner, without having to tap into personal savings, business reserves, or taking on debt.
For extra protection, partners can also purchase disability insurance on each other. Similarly, the policies will be used to fund a buy-sell agreement but will get paid out if a partner develops a disability and is unable to continue to work in the business.
Basic differences of term and permanent insurance
| Step 1 | Your lawyer draws up the buy-sell agreement |
| Step 2 | Partners buy policies on each other |
| Step 3 | Policy benefit funds the agreement |
| Step 4 | Death of a partner triggers payout |
| Step 5 | Payout is used to buy the deceased’s shares |
Note: As with all insurance, it’s good to do periodic reviews to make sure the policy fits the needs of the business as it grows.