Buy - Sell - Makk Financial Services

Buy-Sell

Buy-Sell Agreements For Business Owners

As a business owner, securing the long-term success of your company is a crucial aspect of your financial planning that is often overlooked. Business partners may assume they will be working together for a long time, but various circumstances can impact the business’s sustainability, which must be taken seriously. If one partner dies or leaves due to permanent disability, retirement, bankruptcy, divorce, or unresolved disputes between business owners and shareholders, it can disrupt your business. When a business loses an owner, the remaining partners must decide how the business will continue.

closing down the business
Usually, four options are considered: closing down the business.
selling shares to an interested buyer, or
purchasing the shares from the estate of the deceased owner.

To safeguard your business from the potential damage caused by losing a partner, a Buy/Sell Agreement can be put in place. This type of agreement outlines the terms of ownership and operation of the business and is an essential part of your business plan. It covers the death, disability, and retirement of one of the owners and disputes about ownership and operation that can arise when an owner wants to exit the partnership. The agreement typically includes a formula or process for valuing the business, making it easier to buy out an owner. Our Investment Advisors work with a CIBC Wood Gundy Estate Planning Specialist* and the business owner’s legal counsel to develop and implement appropriate strategies and funding for each unique situation.

Using Insurance To Fund Buy/Sell Agreements

A Buy/Sell Agreement is an important element of any business plan, as it can help avoid potential business disruptions that may arise due to the loss of a partner. There are various ways to fund a Buy/Sell Agreement, but life insurance is often the best solution. By using a Universal Life policy, the cost of the insurance premium is typically lower compared to other funding options. With a Universal Life policy, the insurance and savings components are separated, allowing the policyholder to select from a variety of investment options to allocate the savings portion of the premium. This flexibility can help ensure that the policy meets the unique needs of the business and its owners.

There are three main methods to fund these types of agreements:

Criss-Cross Method

One common way to fund a Buy/Sell Agreement is through a cross-purchase agreement. This involves each shareholder buying a life insurance policy on the life of the other shareholder(s) and naming themselves as the beneficiary. After that, the shareholders and the company complete a Buy/Sell Agreement that mandates the surviving shareholder(s) to buy the shares of the deceased shareholder(s) at fair market value. When a shareholder passes away, the surviving shareholder(s) can use the insurance payout from the deceased’s life insurance policy to purchase the shares from the deceased shareholder’s estate.

Promissory Note Method

This method involves the operating company purchasing a life insurance policy on the life of each shareholder and naming itself as the beneficiary of the policies. A Buy/Sell Agreement is then put in place requiring the surviving shareholder(s) to purchase the shares of the deceased shareholder at fair market value. In the event of a shareholder’s death, the company receives the insurance benefit and uses it to pay the surviving shareholder(s) as a capital dividend, enabling them to fulfill their obligation under the promissory note.

Corporate Redemption Method

To ensure the company can purchase and cancel the shares of a deceased shareholder, the operating company purchases a life insurance policy on the life of each shareholder, with the company named as the beneficiary. When a shareholder passes away, the company receives the insurance benefit and uses it to purchase and cancel the shares of the deceased shareholder. Working with a CIBC Wood Gundy Estate Planning Specialist and the business owner’s legal counsel, our Investment Advisors can help develop and implement strategies and funding methods that are suitable for each individual situation.