Buy Sell Agreements And Business Insurance After The Loss Of A Partner
Losing a vital contributor due to disability or death can be devastating for a business. However, if you currently find yourself in this situation, then you need not worry about it, since you can consider using a buy sell agreement as a solution. To make the most of it though, you need to have yours reviewed by an attorney who is experienced with such contracts.
What is a Buy and Sell Agreement?
The BSA is basically a binding document that makes it possible for the remaining business partners to purchase the deceased partner’s interest at a predetermined price and terms so that the business can be run by the remaining partners. In general, it seems that businesses buy the deceased partner’s share by using key person life insurance. What this means is that they’re going to shoulder the premiums, while the BSA transaction is going to be funded by the death benefits.
Because of its importance, the BSA should be properly drafted by attorneys who have a lot of experience in meeting the organization’s specific needs. Some organizations though, may not want to use an attorney and they opt to use a template instead. If you proceed in this manner, it’s recommended that you don’t overlook the importance of hiring a business attorney to carefully review the agreement and point out any potential legal problems that may arise.
In a similar fashion you can also protect yourself from long term disabilities. Not rare are the cases where an important player in the business may step down due to disability. Luckily, if you have a BSA, you can gain access to funds required to keep the company running even if the key business partner may not return to work anytime soon. Better yet, thanks to disability income protection, you can also pay overhead expenses in the event an owner is incapacitated.
BSA in closely held companies
If a shareholder of a closely held company dies, this may not mean the corporation will go bankrupt, but it can have dire consequences on the way business is conducted and on the deceased shareholder’s stock. In fact, there’s a good chance that his stock can be sold right away. As a solution, the corporation should opt for a BSA which clearly outlines the goals of those making the agreement.
Depending on the content of the agreement, in some cases the other shareholders may have to buy the deceased shareholder’s stock. If the corporation is closely held and stock is problematic, the company should also consider coming up with a stock redemption plan.
Understanding the stock redemption plan
This plan is basically a BSA that stipulates the sale for cash of the deceased owner’s or shareholder’s stock. What this means is that the deceased shareholder’s shares are purchased and redeemed by the corporation. In a closely held corporation, the shareholder may require to be paid in cash for his stock in order to retire or for other reasons. If that’s the case, then funding the BSA can be done by using cash value life insurance when the owner retires.
The same may be true when the owner is incapacitated and is therefore unable to continue running the business anymore. As a result, the stock is going to be redeemed through an agreement. BSA for contingencies such as this may be funded either through a life insurance policy or with the money that comes from disability insurance.
Determining the business value for BSA
Executing BSA agreement or a similar transaction plan is possible only after the business’ value has been accurately determined. For that to be possible, the company needs to consider using a service that is very accurate with their calculations on determining the corporation’s value.
However, it’s important to know that the BSA’s value may have been established long before the value of your corporation is required. Despite that, when the BSA is triggered by a specific event, you will need to have a very accurate report done concerning the value of your corporation.
To make this possible, it’s best that you consider doing some research and then hiring a reliable, professional and experienced business valuation analyst or CPA. Since they can use many methods in order to sue, it’s easy for them to come up with the right solution for you. If you want, then you can also use special online calculators that may help you with this.
What a BSA needs to include
An effective buy and sell agreement needs to include the following factors:
- The person who will determine the valuation of your business and how they’re going to do it.
- The way the BSA is going to be funded (disability insurance, cash, life insurance, etc).
- The specific events that can trigger the BSA (disability, retirement, death).
Since this is a very important legal document, you should make sure that it’s drafted by an experienced lawyer. After all, thanks to a BSA, you can easily salvage a corporation even in the event a key partner steps out. Because of that, you need to be patient and build an adequate contract.