Of course it’s not something you want to think about, but what happens to your business if your partner were to suddenly die?
Buy-Sell Agreements are made between the owners of a business to act as a contract that he or she will sell the designated shares of the company to the other partner for an agreed upon price should a death occur.
How does this work? Let’s say that you agreed to sell your business shares for $500,000 in the event of your death. Your partner could then buy a life insurance policy for $500,000 on you. If you died, she would give that money to your family to gain your portion of the business.
Is this policy the same as a Business Will?
Yes, many insurance agencies or lawyers will refer to this agreement as a Business Will because of the similarities this policy holds to a personal will.
What if I don’t have the necessary cash? Is there a way to help me cover the payment of a buyout should my partner die?
When a death pops up suddenly, it can be difficult to come up with enough cash to buy out a partner’s share of the business. In order to overcome this problem, many businesses opt to take out life insurance policies on each partner to pay out a dividend in the event of death that can be used to buy the shares.
Do our partners have to set the price for their shares ahead of time, or can the family set the price after the death?
If the other partners plan to use a life insurance policy to pay for the buy-out, the price for the shares must be set at the time the policy is written. In order to use life insurance, you are going to have to come up with an amount for the purchase price so that a proper life insurance payout can be set.