5 Key Options For Funding Your Business’ Buy-Sell Agreement

A buy-sell agreement is a basic part of overall business planning. It’s essentially an agreed-upon way that a business owner can be bought out, should the need someday arise. It also involves planning for how a business continues in the event of the death of one or more of the business partners.

Knowing what a buy-sell agreement is, what advantages it can offer, and how to best fund it are key pieces of knowledge to help any business succeed across years, decades, and generations to come.

Here are the basics on how to fund a buy-sell agreement and some other closely related matters.

What Is The Purpose of a Buy-Sell Agreement?

Most businesses need some form of a buy-sell agreement. As soon as you have two or more owners involved, you have to start thinking about the business’s future – even if one or more of the current owners passes away, retires, or for any reason wants to sell his or her share in the company.

The terms under which an owner can be bought out must be spelled out ahead of time in a legal document. Who is eligible to buy out whom? Will a new owner have the same clout as an original owner? How shall the value of the owner’s share be determined? – this may require periodic business valuations, for example.

It’s important to have an experienced attorney draw up a customized buy-sell agreement and integrate it into your overall business continuation plan. The earlier you do this, the safer it is for your business and for those who own any part of it.

What Are the Advantages of Having a Buy-Sell Agreement?

We have already looked at the basic definition of a buy-sell business agreement above. But what are the major advantages to be gained by having one in place?

Here are the top benefits to keep in mind:

• Allows for smooth transitions should a change or partial change of ownership come to your business.
• Creates peace of mind and general security for the remaining owners and their families.
• Provides for a first option to buy and helps create a market for a business where one might not otherwise exist.
• Allows retiring owners or the estate of a deceased former owner to access necessary funds.
• Helps take care of certain tax issues like federal estate tax valuations and similar matters.
• Clarifies all terms of buying, selling, transfer of ownership, and payments so as to help avoid needless disputes.
• Can be easily funded in a variety of ways, especially via a viable life insurance policy.

Top 5 Options For Funding Your Buy-Sell Agreement

Once you realize your business needs a buy-sell agreement, you should talk to a lawyer to help draft one. You should, of course, discuss the terms to be used with all business partners and come to an agreement.

But the next thing to consider is how you are going to fund the buy-sell agreement. Here are the most commonly used funding methods:

1. Use your own money – Some business owners simply reinvest some of their own personal earnings back into their business in the form of, among other things, funding a buy-sell agreement.
2. Use the company’s money – Other business owners prefer to utilize some of the business’ money to fund the agreement. This saves you your personal cash but cuts down on company cash flow and liquidity.
3. Create a “business sinking fund.” – Making a special fund, saved up little by little over time, to use for buy-sell-type situations is another option. But the funds available are often insufficient under this method, and disputes can easily arise.
4. Borrow the funding – Taking out a loan is a popular way to fund a buy-sell agreement. Gradual payback means less money required upfront, helping cash flow issues. But you have to pay interest, and the loss of an owner may impact the borrowing ability of the business negatively.
5. Life insurance as a funding option – The simplest and most affordable way to fund a buy-sell agreement is to use some form of life insurance or disability insurance (with a buyout option) for the purpose. Life insurance will guarantee the funds are there when you need them and not tie up your business capital or stifle your cash flow. Plus, the policy can build cash value over time.

To learn more about buy-sell agreements, how they work, and how best to fund them in your particular business situation, contact an experienced insurance broker and business advisor at Flagler Financial today! We can help you get started in protecting your business’ future!