Five Reasons to Adopt a Life Insurance-Funded Buy-Sell Agreement

You are overlooking a must-have tool for protecting your business and providing for your family.

If something can go wrong, it will, which could be the motto of anyone who runs a small or medium-sized business. Just keeping everything on track and putting out brush fires can consume most of your day.

And that might mean you are overlooking a must-have tool for protecting your business and providing for your family.

That tool is called a Buy-Sell Agreement (BSA), and if you don’t have one, you are in good company. More than half of SMB owners don’t, even though 80% of them say their enterprise is their most valuable family asset. Without a properly funded BSA in place, though, that asset is in jeopardy.

What is a Buy-Sell Agreement? A BSA is a legally binding contract that serves as the blueprint for transferring ownership shares of the company in the aftermath of pivotal events such as the death, disability, retirement, or voluntary exit of a principal.

It’s not an overstatement to say a well-crafted, sufficiently funded BSA is an essential element of a business’ success. It fosters smooth transitions, preserves the value of the business and mitigates risks. As a strategic tool, a BSA protects the principals’ interests in the business and provides for their families.

On the other hand, failure to develop a robust BSA opens the gates to unreasonable risk. Without one, disputes and costly litigation over transferring ownership shares and valuation can erupt. Liquidity can bleed out for lack of a transition funding mechanism. Creditors and unrelated third parties can exert unwanted pressures. The downside can be bottomless.

What are Five Benefits of Having a BSA?

A robust BSA with sufficient funding to ensure its effectiveness provides these benefits:

• A BSA funded with life insurance provides immediate liquidity for buyouts in the event of a principal’s death, which avoids disruptions and preserves operational continuity.



• It ensures fair compensation for deceased principals’ beneficiaries, preventing conflicts and maintaining the financial health of the business during critical ownership changes.



• It mitigates financial risks associated with ownership transitions, eliminating the need to liquidate assets or strain cash reserves.



• It enables owners to explore new ventures, expand operations or attract investors with the assurance of a structured and funded exit strategy in place.



• It protects owners’ families by specifying funding strategies for transition of ownership shares.

Small businesses that leverage life insurance for their buy-sell agreements set themselves on a path to sustained success, resilience, and prosperity in an ever-evolving marketplace.

How Does Life Insurance Fund a BSA?

Life insurance is an ideal way to ensure the BSA provides sufficient liquidity to protect the business after the death of partner.

BSAs are structured to fit the specific needs of the partners, their strategy for transferring ownership and how they want to provide for their families or estates. Here is an example of how life insurance can be used to fund a cross-purchase BSA:

• Individual co-owners buy and pay the premiums on life insurance policies on the lives of each other but not themselves.



• Upon the death of a covered principal, the policy pays a tax-free lump-sum cash benefit to the beneficiaries.



• The money is used per the BSA; for instance, the surviving partners can use it to buy the deceased partner’s share of the company from the heirs.

The cash buy-out ensures a seamless ownership transition, the integrity of the company’s assets and the survivors’ financial well being.

What is the Process for Developing a BSA?

Developing a BSA is a collaborative effort involving the partners, key personnel, estates and families, and professional advisors. A typical process might include:

• Defining the events that would trigger the BSA; for instance the death, disability, retirement, or voluntary departure of a principal.



• Determining the method of valuation—fair market or book value or a formula agreed to by the partners.



• Selecting the funding mechanism—if the death of a partner is the BSA trigger, life insurance provides a tax-free, lump-sum cash payout.



• Specifying the terms of the BSA, including the rights and obligations of the parties, the timing of the buyout, any restrictions on transferring ownership, and the process for resolving disputes.



• Drafting the contract with the assistance of legal and financial advisors



• Educating all stakeholders, including families and estates, on their rights and responsibilities



• Reviewing and updating the contract to account for changes in ownership, valuation methods and legalities.

Small businesses that prioritize this foundational document pave the way for long-term business stability, family financial security and harmonious ownership transitions, ensuring a thriving professional and personal legacy for generations to come.

To schedule a confidential, no-obligation executive consultation, contact Realm Health at (844) 802-3842 Opt 2 or via RealmHealth.com/Realm4Life.