How to Fund a Buy-Sell Agreement

Business partners need to protect each other against premature death and disabling accidents or illness.

Instructions

Difficulty: Moderately Challenging

Things You’ll Need:

• Insurance
• IRS Forms
• Tax Services
• Business Times
• Business Services
• Whole Life Insurance
• Tax Preparation Software
• Term Life Insurance
• Plan-idea Books
• Decision Analysis Software
• Stress Management Counseling
• Financial Manager
• Attorney Referral Services
• Workplace Disability Management
• Business Books
• Self-help Law Books
• Life Insurance
• Legal Counsellors
• Tax Consultants
• Accounting Services
• Wall Street Journal
• Appraisals

1. Consider whether the partial or total disability of a business partner would adversely effect the continuation of the business.
2. Calculate the approximate dollar value of that loss.
3. Consider whether the untimely death of a partner would adversely effect the continuation of the business.
4. Calculate the approximate dollar value of that loss.
5. Factor in the consequences of having the spouse or family members of a partner becoming dependent on the business in the event of either of those possibilities.
6. Seek the counsel of an experienced business attorney to create a "buy-sell" agreement between the partners including "disability buy-out" arrangements in the document.
7. Find a competent insurance agent that specializes in business life and disability coverage.
8. Apply for insurance policies to fund the buy-sell agreement so that in the event of death or disability, the benefits of those policies will provide cash flow for the continuation of business.

Tips & Warnings

• Set aside a special time to discuss just this one topic without interruption.
• Consult with other business owners to find out how they are managing the risk of death or disability among partners and key employees.
• Get referrals for legal and insurance professionals from trusted associates.
• Consult with your tax advisor in coordination with attorneys and insurance agents.
• Consider a "sinking fund" in lieu of insurance if that makes more economic sense.
• Premiums for insurance may be deductible as a business expense.
• Business insurance of this type is a specialty, so seek professionals that focus on this type of work.
• If you don't financially accommodate the buy-out of a surviving spouse, he or she could suddenly become your business partner.
• The disability of your business partner could burden your company with providing income to a non-productive person for a long period of time unless you transfer that risk to an insurance company or set up a sinking fund against that contingency.
• Make sure any insurance you purchase is placed with a financially secure insurance company with high ratings from AM Best, Standard & Poors, Moody's, Duff & Phelps or Weiss.