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The Business Owner Buy/Sell Insurance

Introduction:

  • There are many people who own a business. There are very few people who have a business succession plan. If the owner doesn’t wake up one morning, they leave their family, their employees, their vendors, and their creditors, all the people that rely on their business, high and dry. That’s because the business may pass through their will, leaving a surviving spouse the owner of a business they may know nothing about how to operate.
  • Maybe there’s a natural successor. But then, how does the true value of the business pass to the spouse? What should be paid to sell that business? How will a buyer fund the purchase?
  • I realize that not all business owners are 34 and blessed to be in good health. But if I don’t wake up tomorrow, my business partner will have the capital to buy my business from my wife, make good on my promises to my clients, and continue my goodwill in the community. How? Because of life insurance and a buy/sell agreement. And he pays very little to make sure all of that is true. Yet many business owners ignore (what I will call) their business obligation.

Where the CFP® sees the fit:

  • Solo business owners with a clear successor who isn’t a spouse (such as a business partner) and who would need capital to buy the business from that spouse in the event of an untimely death.
  • Businesses with multiple partners who would not be interested in working with another partner’s surviving spouse in the event of an untimely death. Life insurance on each other could provide liquid capital to buy out that spouse’s interest, in the event of an untimely death.
  • Businesses with strong cash flow who wouldn’t mind combining this buy/sell insurance idea with an accumulation plan by funding permanent life insurance policies where the potential to build cash value exists.

The strategy:

  • The process starts with a business valuation, whether this is based on market metrics, revenue, or simply your own assessment. The buy-sell agreement acts as the official document to protect everyone’s interests, setting the price and terms for a buyout. Then most buy-sells are funded with life insurance because it is the simplest means of guaranteeing that should an owner pass away, the event which creates the need for cash, also, creates the cash to satisfy that need. Other alternatives are borrowing funds or creating an installment plan. But depending on the specific situation, insurance can be a cost effective means to protect all interests.

Additional notes:

  • Business succession plans and valuations should be unique to your business, which may require devoted attention and time. But in the end, something is always better than nothing. So put something in place, even if it needs to be altered over time.
  • This is insurance. So you must be healthy enough in the eyes of an insurer to obtain coverage.
  • A legal document will be needed. And yes, that may require time and capital. But really, it’s about setting clear expectations with all parties involved and providing funding, if ever needed.

Bottom line:

  • For business owners, the majority of their assets may be tied to the business. It’s best not to leave the succession of that business to chance. Make a plan, document it, and then be sure it’s able to be funded, which more often than not, requires insurance.

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Securities offered through LPL Financial, Member FINRA and SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor. U.S. Financial Advisors and Haas Financial Group are separate entities from LPL Financial.

This material contains only general descriptions and strategies for use of a buy/sell life insurance policy. Guarantees are based on the claims paying ability of the issuing company. This content should not be considered a substitute for individual financial advice. If you need more information or would like personal advice you may contact our office.

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