The following article by the National Federation of Business (NFIB) provides instances where Buy-Sell Agreements require insurance to fund the operative element of the agreement. For an in depth examination of how to adequately fund a Buy-Sell Agreement for your business, as well as other key business insurance, speak to your insurance agent at the organizational phase of your new business venture.

Alan Plafker, CIPA,
President/CEO of Member Brokerage Service LLC,
a Melrose Credit Union Service Organization ( www.MemberBrokerage.com)
President Elect on the Board of Directors the PIANY
(Professional Insurance Agents Association of NY)
Member of CIBGNY (Council of Insurance Brokers of Greater NY)
Treasurer for the New York Independent Livery Driver Benefit Fund Board of Directors.

REDUCE YOUR RISK...
LEARN HOW A BUY-SELL AGREEMENT CAN HELP PROTECT YOUR BUSINESS.

Is your business at risk? You've been in business with your partner for 12 years. If something happened to your partner tonight would you be forced to become partners with the heirs? Or, maybe you’re a sole proprietor planning for your heirs to sell your company to a key employee at your death but they can’t agree on the sale terms, appropriate pricing, and/or don’t have the available funds when needed? If you do not have a properly drafted and funded “Buy-Sell Agreement” in place, you are taking that risk…every day!

Small business owners should plan effectively to determine what happens to their business in the event of permanent disability or death of the owner. Proper planning can lead to an orderly transfer of business interests in a way that satisfies the goals of all parties.

What is a Buy-Sell Agreement?

Simply stated, a properly drafted and funded Buy/Sell Agreement accomplishes the following goals:

• Establishes the events that trigger a buyout, such as death of an owner,
  
  
• Removes uncertainty by protecting the interests of all parties,
  
  
• Identifies the future buyers,
  
  
• Predetermines the sales price of the business through an agreed upon valuation method,
  
  
• Provides the ready cash to ensure the business is sold at a fair price.
  

How do I set up a Buy-Sell Agreement?

Your attorney, CPA, and life insurance professional can be extremely helpful in this area. While there are document templates that cover the broad issues, the specific terms of your agreement must to be tailored to meet the objectives of you and the intended buyers. A short conversation with your attorney can help you determine how complex your agreement needs to be.

How do I fund the agreement?

The best contractual agreement, by itself, may not be worth the paper it’s written on without the cash required to implement the plan! In the case of a business owner’s premature death, life insurance is generally the best way to provide timely access to tax free proceeds exactly when needed.

American General Life and Accident Insurance Company (AGLA), an NFIB preferred provider, works with small business owners every day to help provide the funds necessary to fulfill these types of agreements.

Why You Need a Buy-Sell Agreement

Even in the best business partnership, nothing lasts forever

When Scott Walker elected to go into business for himself 16 years ago, one of the first things he did was to call a lawyer. The resulting buy-sell agreement that he put into place with his two other partners for their Atlanta area audio-visual consulting business became one of the smartest things he did.

Seven years in, the three partners had philosophical differences about where they wanted to take the business. Walker was younger than the others and wanted to grow it. He ended up buying out the others with the help of a new partner by activating the buy-sell agreement.

"It sounds like a remote, distant thing," says Walker, president of Waveguide Consulting. "But you’re going to want to talk about buy-sell even though you haven’t even started yet. It’s a very important thing to think about because nothing lasts forever, and it’s a good thing we did because we’ve already exercised it.

"Now my current partner and I have been through it, buying out the other two guys, and we also respect how important it is."

3 THINGS TO CONSIDER BEFORE BREAKING UP YOUR BUSINESS PARTNERSHIP

Sometimes two or more owners disagree on the future of the business, and sometimes that disagreement leads to a partnership breakup. But what happens to the business? Here are three things you’ll need to know before breaking up yours.

1. Leverage is the biggest issue.

Cindy Jones, a partner with business law firm Avatar Legal in San Diego, says partners who mutually agree they need to move on typically reach an agreement on terms like payment. But most of the time, business breakups occur because one person decides the other is a problem.

"The way the law is set up, you can't force the other side to do anything, to sell their shares or buy you out," Jones says. In other words, the leverage often goes to the person who wants to stay. "If it's just unbearable, you'll have to get out yourself, and often that means taking a loss," she says.

2. Departing owners may still have legal liability.

If your business is set up as a limited liability company, limited partnership, corporation or another state specific structure that protects an owner's personal liability for company actions, you shouldn't have to worry about retaining personal legal liability for the business' actions after you leave.

However, for legal structures that carry personal liability, such as partnerships, departing owners may not be absolved of all legal liability for business actions that occurred pre-breakup. "You would need to agree with the former partner during the breakup that if you got sued for something that happened while you were still an owner, you wouldn't be on the hook," Jones says.

3. Departing owners may still have financial liability.

Owners of new businesses often sign personal guarantees for bank loans. But even if you sell or give up your shares in the business, you won't be off the hook if your previous co-owner defaults down the road. Jones says banks can release owners from their personal guarantees, but it's up to them, and only them, to make that decision.

"The bank can also ask for something in exchange, like paying a chunk of the loan to reduce the bank's liability," Jones says. Or, if a new owner is coming in, the bank may be willing to transfer the personal guarantee to the new person.

Insuring or Funding the Agreement

According to a brochure that Northwestern Mutual Financial Network provides to prospective clients for insurance to help underwrite such agreements, "A buy-sell agreement controls what happens to a business when a specified event occurs, such as a shareholder's death or disability" but it also can be used for internal squabbles.

In a two person partnership, such as an S-Corp., the principals can set up a "cross purchase" plan. In such a system, each partner takes out an insurance policy on the other for roughly half the value of the company. If a partner dies, then the other partner pays the spouse with the proceeds from the policy. This consolidates ownership and provides a needed cash influx for the grieving spouse.

"So that spouse would rather have the income, the insurance, than suddenly get into the AV business," Walker says of his situation. "And the same applies for my wife. So that's something people need to think about, 'Do you really want to go into business with your deceased ex-partner's spouse?'"

In a business with multiple partners, the business owns the policies on each of the partners and the ownership share would be increased on a percentage basis once a partner drops out based on the company's original partnership agreement.

An important benefit of structuring the agreement through insurance is that the business would not have to use its revenue for the buyout of the former partner's spouse. Without insurance, a buy-sell agreement is considered to be "unfunded."

Protecting the Human Asset

Along with insuring a buy-sell agreement, small companies might also consider "key person" insurance. This provides for the potential loss of revenues that could result from a business if one of the partners dies an unforeseen death on top of the cross purchase plan. Key person insurance helps the business bide time to hire and train a replacement for the lost partner.

Joyce Stone is a part owner in Hammond Residential, a property management company that operates in seven Southeastern states. She has been in business with her current partner for almost six years and watched it grow from managing 800 residential units to 7,500 at present.

The key person policy provides for "some income into the company to help the surviving partner be able to hire somebody to kind of step in where the partner was until you can regroup," Stone says. "Because that's a big thing. We built the whole company together."

KEY PERSON INSURANCE: HOW IT WORKS

In the event of the death of a key colleague, key person insurance can help keep your business afloat. Here’s what to consider.

No one wants to consider the death of a colleague. But if such a tragedy could lead to your company's demise, then key person insurance is a worthwhile precaution. It is life
insurance on specific people in a business and is beneficial when a company's survival relies heavily on the role of one or two people.

Some small business owners don't understand that they need key person insurance, in addition to life and disability insurance, because it's designed to protect the business, says Rich Davis, a commercial insurance agent in Portland, Ore. If your company employs more than one person, review the basics below to determine whether it makes sense for you.

Who is insured?

Typically, key person insurance covers the owner, the founders or one or two key employees. Jeff Kear, owner of Planning Pod in Denver, Colo., says his company purchases it to cover its primary shareholders. He recommends talking to an agent with small business experience to determine what package is right for you.

Business, Not Personal

The partners should update their policies every three to five years, depending on the growth, or devaluation, of the company, to reflect its most current valuation. Being under insured could cause obvious problems.

Whether the reasons for breaking up a partnership are death, philosophical differences, or even fraud or a criminal act by one of the partners, Walker cites an old adage that, "It's better to mend the roof while the sun's out than in the eye of the storm", even though it might seem like a downer to start an exciting time like the start of a new business venture on a sour note.

"These are emotional times when going through this," he says. "It's nice to look at a document and say, 'Here's what we agreed'... and then you can just be somewhat mechanical about that part of it versus the emotional side about what may be going.

© 2013 TLC Magazine Online, Inc.