North Star Insurance Consultants LLC

BUSINESS SUCCESSION PLANNING

Buy Sell for Business Owners

One of the major concerns facing owners of family or closely held businesses is how to affect an orderly transfer of the business to the next generation or to a key employee. The main issue in succession planning is to achieve a smooth transition between the current owner and the future owner(s), while providing a way to turn the business interest into cash needed to pay for liquidity needs, such as retirement income, survivor income or estate settlement costs.

The first critical step is to decide what he/she would like to happen to the business. Once they have a transition plan in mind, a written plan called a Buy Sell agreement, is prepared.

Once the agreement is in place, the parties need to select and implement funding for the agreement. Various methods exist, such as setting up a Sinking Fund, obtain Loans, agreeing to an Installment Sale, or the use of Life Insurance, which is often considered the preferred method of funding.

With Life Insurance, a policy is purchased on the life of each owner:

• At disability or retirement, cash value is used to purchase shares – Owner then sells shares to the successor.
• At death, tax-free proceeds used to purchase shares – Deceased owner’s family sells shares to successor owner.

There are several types of Buy Sell agreements:

• Stock redemption agreement
• Cross purchase agreement
• Wait and See agreement
• One-way agreement

A Buy Sell agreement is a legally binding contract, so professional help is necessary. The business owner(s) should seek the counsel of an experienced business attorney to create a Buy Sell agreement.