If you are in a business as a partner or co-owner, you have probably spent a great deal of time creating financial value in your company. One question that gets overlooked is, “What happens to the business if something happens to me or my business partner?” In order to protect against this, you should consider setting up a buy-sell agreement, this will allow for a smooth transition and buyout of a business partners shares, should something happen. One component of the buy-sell agreement to think about is, “Where does the money come from?” Generally companies will fund them with both life and disability insurance to protect the business from the loss of a business partner due to death and extended absence because of injury or illness.
One thing that always needs to be taken in to consideration with the buy-sell agreement is knowing where the money will come from to fund it. There are only a few ways it can be funded:
Cash - If the company has enough free cash, this can be used to buyout the shares. Unfortunately, most businesses don’t have the amount of capital on hand to fund it.
Sinking fund - With this method, the company will set aside money to purchase the shares of the business. The only problem with this is what if something happens before it is fully funded?
Borrowing funds or installment note - The funds can always work with your bank or financial institution to come up with the money. However, if there are lost revenues, knowledge, etc, it might be difficult to obtain funding.
Life and Disability Insurance - For many companies life and disability insurance can be a cost effective option. The cost and ability to obtain the insurance can vary based off of health age and benefit amount.
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