Business owners are good at long-range planning, according to recent research. Actually, it might be the other way around: People who naturally have a long-range outlook tend to make good business owners. Surveys have found that a common trait among small-business owners is the ability to focus on the future, and that family businesses may be better positioned to weather economic downturns than non-family-owned businesses because of their ability to take a long-range approach.1–2
Although you might know with equal certainty what you are going to do tomorrow and what you intend to do years from now, life can step in and hand you a surprise. You may be able to plan for that eventuality by putting together the appropriate buy-sell agreement, a binding contract that can help smooth the transfer of ownership, regardless of whether you were expecting to leave.
Find the Best One
Buy-sell agreements can be shaped to fit a business’s unique circumstances.
A cross-purchase agreement stipulates that the departing owner will sell his or her share of the business to the remaining owners.
A stock redemption agreement provides for the exiting owner to be bought out by the business itself.
A hybrid agreement combines elements of the first two; typically, the departing owner offers his or her share to the business first, then to the other owners.
Arranging for the business or the partners to buy out a departing owner is a good first step, but it’s meaningless if the sale is unexpected and the buyers don’t have the money. For that reason, it may be a good idea to fund a buy-sell agreement with life insurance and/or disability income insurance policies. The guaranteed liquidity from the policies can help prevent survivors from having to sell assets or borrow money.
The cost and availability of insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving insurance, it would be prudent to make sure that you are insurable. Any guarantees are contingent on the claims-paying ability of the issuing insurance company.
For Strategic Business Planning in Naperville, please contact us at 630-548-9600
1) Inc.com, July 1, 2010
2) GrowthBusiness.co.uk, 2009
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.
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