What is a Buy-Sell Agreement?
As we celebrate Life Insurance Awareness Month, it’s a great time to look beyond personal protection and explore how life insurance supports business owners. One strategic use of life insurance is funding a buy-sell agreement—a tool that protects the long-term stability of the business.
A buy-sell agreement is a legally binding contract that outlines what happens to an owner’s share of the business if they leave, retire, become disabled, or pass away. It helps ensure that the business can continue operating smoothly, while protecting the financial interests of all parties involved.
Key Functions of a Buy-Sell Agreement:
Ensures Business Continuity Without a plan in place, an unexpected change in ownership due to death or disability can lead to chaos, legal disputes, or even the dissolution of the business. A buy-sell agreement provides clear instructions and valuation terms for a business transfer.
Provides a Ready Buyer The agreement outlines who may buy the departing owner's interest – often other co-owners or the business itself – ensuring that ownership stays within a trusted circle.
Protects Families and Heirs In the event of a partner’s death, the agreement allows their heirs to receive fair compensation for the partner’s share without becoming active business partners themselves – unless that’s the intent.
How Life Insurance Plays a Role
An effective way to fund a buy-sell agreement is through life insurance. It ensures that, in the event of a business owner's death, there is immediate liquidity to buy out their share – without putting financial strain on the business or surviving partners.
Here’s a simplified look at how it works:
The business or co-owners take out life insurance policies on each other.
If an owner passes away, the death benefit is used to buy out their share from their family or estate.
This allows the business to continue smoothly, while the deceased owner's family receives a fair payout.
Types of Buy-Sell Agreements
Cross-Purchase Agreement:
Each owner buys a policy on the other. Upon death, the surviving owner(s) use the death benefit to purchase the deceased’s share.
Entity Purchase (Stock Redemption) Agreement:
The business itself purchases the policies and buys back the deceased owner's interest.
Wait-and-See Agreement:
A hybrid approach that gives flexibility to determine whether the business or individual owners will purchase the interest.
Why It Matters
A well-structured buy-sell agreement:
Eliminates uncertainty about what happens when an owner exits the business.
Helps avoid conflicts among remaining owners and the deceased’s family.
Protects the value and future of the business you worked so hard to build.
To discuss how a buy-sell agreement may fit in with your financial plan, reach out to our team today.
This article is for information purposes only and should not be construed as an investment recommendation. Past performance is no guarantee of future performance. Diversification does not guarantee a profit or protect against loss in declining markets. Investing involves risk, including the potential loss of principal. West Michigan Advisors is an investment adviser registered with the U.S. Securities and Exchange Commission. Securities offered through Level Four Financial, LLC, member FINRA/SIPC.
The material has been gathered from sources believed to be reliable, however West Michigan Advisors cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. To determine which investments or planning strategies may be appropriate for you, consult your financial advisor or other industry professional prior to investing or implementing a planning strategy. This article is not intended to provide investment, tax or legal advice, and nothing contained in these materials should be taken as such. Investment Advisory services are offered through West Michigan Advisors. Advisory services are only offered where West Michigan Advisors and its representatives are properly licensed or exempt from licensure. No advice may be rendered unless a client agreement is in place. Securities offered through Level Four Financial, LLC, a registered broker dealer and Member of FINRA/SIPC.