Business owners with the desire to see their businesses continue after they are no longer involved need to plan quite carefully.
When an owner (or owners as it may be) is planning for succession in a retirement or buyout scenario there are many things to consider. When the succession planning being addressed involves the death of the owner, the topic of life insurance comes to the forefront.
With business succession planning, as in other estate planning1 situations, life insurance can provide an immediate lump sum of money. That sum, the death benefit, can be used by the beneficiary to buy out the deceased owner’s share of the business.
One of the most common business succession planning strategies is the “buy-sell agreement”. A buy-sell agreement is when one party (or parties as it may be) agrees to buy the deceased owner’s share of the business at a predetermined price from the deceased owner’s estate or heirs. Having such an agreement in place can help to ensure the smooth transition of ownership while also minimizing the potential disruption of day-to-day operations; operations that may already be impacted because of the deceased owner’s absence.
The life insurance policy can provide the funding necessary to buy out the deceased owner’s share of the business. A business’s continuation can be jeopardized when there is no agreement and/or insurance policy in place. Without these two components, the remaining owner(s) could be forced to liquidate if the heirs are not interested in keeping the business, forcing the remaining owner(s) to try and raise the capital needed to buy out the heirs. Failure to do so could mean the end of the business.