What is a Buy-Sell Agreement?
A buy-sell agreement is a legally binding contract which protects the interests of the company’s owners and/or shareholders, and permits the business to continue in the event of the death, disability, or retirement of a key business owner or shareholder. A buy-sell agreement is drafted by an attorney and can be implemented in all forms of companies including, partnerships, limited liability companies, and corporations. A buy-sell plan can be thought of as a written agreement to help insure that the business remains in the intended hands for the long term benefit of the business.
The easiest and most economical way to fund a buy-sell agreement is with life and disability insurance. Both life and disability income insurance can provide the liquidity to fund a buy-sell agreement at the exact time the funds are needed. If a covered business owner or shareholder dies, a life insurance policy can guarantee that the liquid funds will be available to fulfill the terms of the agreement. At the same time, life insurance policies can also grow cash value that can be used to purchase a retiring partner’s interest. Finally, a disability buy-out policy can be secured to guarantee that funds will be readily available in the event of a long term disability to a business owner. Life and disability insurance policies are the perfect vehicles to cover potential business succession risks.
In many cases, and especially in small to medium size businesses, a few top managers posses specific talents, skills and experience that determine the performance of the business. These key employees are critical to the long term success of the enterprise. Losing one of these essential people due to a death or disability can have a serious detrimental effect on the business. Key person insurance can protect the business from such losses.