“The best way to predict your future is to create it.” Abraham Lincoln’s humbling failures early in his life are attributed to the success he was able to achieve. He knew he couldn’t control today, but by purposefully planning tomorrow, the future could be bright.  

Most business owners have given at least some thought to whom they would like to eventually take over their business. Some business owners plan to leave their business to the next generation, others have a desire to sell to a key employee, and others may take their chances on selling in the open market. However, succession planning may also be critical in the event of divorce, retirement, incapacitation, or death of one of the owners. Such events lead to numerous questions. What is the business worth? Who can own voting rights? Will cash flow or liquidity become an issue? Do I want my family dependent upon successor owners for their income?   

Regardless of your preferred transition path, a properly structured and maintained operating agreement with buy-sell provisions can help outline what happens in such planned or unplanned events. It memorializes intentions regarding transition events, helps protect the business (and your family), helps avoid valuation tax surprises, and ensures orderly transitions. Use of life insurance, business overhead expense insurance, and disability buy out insurance is common to ensure adequate funds exist for unpredictable events while gifting and other planning strategies may be used to address longer term planned transitions.   

Implementing a Buy-Sell

There are 5 steps to properly implement your Buy-Sell plan: 

The Plan: Determine what you want to happen to the business if you are not here or well enough to run it on your own.  

• Hint: Your advisory team can be immensely helpful here. Lean on them as they’ve worked with numerous business owners like you. You don’t have to figure it out alone! 

Business Valuation: Determine the Fair Market Value of your business.  

• Hint: Start with your accounting professional or attorney as to whether you need a formal or informal business valuation at this stage in your planning.  

Documenting the Plan: Once you have a conceptual plan in mind, meet with your estate and/or business planning attorney to memorialize the plan. Typically, the Buy-Sell provisions will be documented as part of your business’ Operating Agreement.  

Fund the Plan: Collaborate with an independent, experienced insurance professional to make certain the insurance is implemented in a manner consistent with the buy-sell provisions.  

• Hint: Failure to align the insurance with the Buy-Sell provisions may result in adverse tax consequences or worse, the plan failing to meet the intended goals.  

Review and Communicate the Plan: Reviewing the Buy-Sell agreement annually is important. Here are some things to think through: 

• Have I communicated the plan with the appropriate parties? 
• Has the value of the business changed? 
• Are you considering additional owners? If so, how does that impact the buy-sell agreement?  
• Has an owner married or divorced, and how does that impact the planning?  
• Has there been a change in health, finances, or employment of an owner or prospective owner that may alter the planning time horizon?  
• Are my funding strategies and insurance protection levels still adequate, or do I need to modify them to reflect changes in the business value or ownership structure?  

 Types of Life Insurance to Consider

• “If I die” Term Life Insurance: Cost-effective coverage to meet a specific timeline. This is generally the most common type in buy-sell agreements. Make sure to understand the contractual conversion privileges! 

• “When I die” Permanent life insurance: Coverage designed for a long-term time horizon, certain buy out options, and possibly part of an overall estate plan.  

• Key-Person Life Insurance: Coverage purchased on an owner or key-person to keep the business afloat in the event of death. For a key-person, this can also be coupled with a Key-Person retention plan or “Golden Handcuffs” insurance program to retain the key-person.  

Types of Disability Insurance to Consider

• Disability Buy-Out (DBO): Is typically paid after a stated period of the owner being disabled. This timeline should match the provisions of a disabled owner in the buy-sell agreement.  

• Business Overhead Expense (BOE): BOE provides income replacement for the company if an owner is disabled for a period of time. This is most used in closely held medical and dental practices but is applicable to any professional services business.  

The consequences of unplanned transition events to your family, other owners, and your employees are too significant to leave up to chance. Working with your advisory team to craft, execute, and maintain proper buy-sell provisions can provide peace of mind and a path forward for everyone involved.   

If you don’t know where to start, give us a call. We can help arm you with some questions to consider and connect you with an experienced team to guide you.