Keeping Your Business with Those You Trust
Building your business may be one of your proudest achievements, and you probably want it to continue to thrive when you’re no longer around. Your employees and loyal customers may feel the same way. So who will take over in the event that you retire, pass away, or become disabled and can no longer keep running the business?
Many businesses are run by a single owner and are typically passed along to family members. But perhaps in your family, there’s no one who is willing or able to run the business. Perhaps there’s an employee who has worked for you for a long time and knows the business inside and out, and would love to take the reins.
You could transfer your business to a family member or employee outright. But what if you want to use the value of the business to fund your retirement, or provide for your spouse and your estate settlement expenses if you were to die? A one-way (or unilateral, as it’s sometimes called) buy-sell agreement can help.
How a One-Way Buy-Sell Works
A one-way buy sell agreement is a legal contract stating that a specific person will buy your business when you retire, become permanently disabled or die. (You can set up the conditions however you want.) Either a sale price is set in the agreement, or a formula is agreed upon for calculating the price at the time of the purchase, to account for any changes in the value of the business over time.
The next step is to ensure that the future buyer will actually have the money to buy the business when it’s time. Otherwise, you can’t guarantee that you’ll get the full value of your business — which ultimately defeats the purpose of the whole arrangement. You want to make sure you get enough from the sale to help fund your retirement or provide for your spouse or heirs.
There are different ways to make sure the funds for the purchase are there, but one method would be to fund with permanent life insurance. Here’s how it works: A permanent (i.e., not term) life insurance policy is purchased on your life, with the chosen successor as owner and beneficiary. Then, when you die and the purchase occurs, the successor uses the proceeds from the policy’s death benefit to buy the company from your estate, with the monies passing through to your heirs.
Typically, your business would cover the cost of the premiums for this policy in the form of loans or bonuses to the successor. You can also set it up so that the successor covers the full cost of the premiums, and adjust the sale price of the business accordingly.
This approach also works if you want the successor to buy the business when you retire, or if you became disabled. In this case, the successor could use the cash value1 that the policy has accrued to help fund the purchase of the business. Your Financial Professional can provide more information on the different options available to you.
Why is Using Insurance a Good Way to Go?
There are advantages to setting up a one-way buy-sell agreement with life insurance, including because the death benefit and cash value of the policy is available to fund the purchase when it’s time. There are tax benefits, too. If you’re giving bonuses to the successor to pay the premiums on the policy, the bonus payments may be tax deductible to the company. The successor will, however, have to pay income taxes on the bonus money received.
Position Your Business for the Long Term
The vast majority of small businesses don’t last without a clear successor. But if you want to ensure that yours does for the sake of your family, your employees and your community, setting up a one-way buy-sell agreement can be a great strategy.