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December 2007 Newsletter

Is your business protected? Owners who plan avoid future turmoil.
Stefanie Richard

Imagine what would happen if one of the co-owners of your business suddenly became disabled or passed on. It could mean the disruption of your business, your income and possibly even your plans for a comfortable and carefree retirement. Business succession planning – including a well constructed buysell agreement – makes good business sense, for all co-owners of a partnership or a corporation.

Establish rules for succession
Buy-sell agreements – sometimes included as part of shareholder agreements – can provide clear ‘rules’ for succession upon death or other triggering events, and benefit the interests of all shareholders. Such an agreement can play an important role in the reservation of a business and in providing financial security for the business owners and their families. You and your co-owner(s) establish the rules for succession by creating and entering into a buy-sell agreement that sets out firm commitments and obligations for buyer and seller and their respective heirs. A properly drafted agreement will set out provisions for triggering events, like the death or disability of a co-owner, retirement, divorce, bankruptcy of a co-owner or a falling out between co-owners. Your existing partnership agreement or shareholders agreement may already take some of these triggering events into account. It’s important for you to know which ones are included and why others were not considered when your agreement was drafted.

Show me the money
If one party dies or becomes disabled, where does the surviving/healthy co-owner(s) get he money to acquire that party’s share of the business? You can use your own money if you have the liquidity. Or, you can sell off other assets, but in most cases these assets will not bring full value in a forced sale situation, so these are usually not attractive options. You can borrow the money, but given that interest costs will apply and the principal must be paid back with after tax dollars and is not tax-deductible, this solution is not usually considered optimal either. The most attractive option when one co-owner dies or becomes disabled is usually using the proceeds from an insurance policy; a relatively inexpensive way to help fund the buy-sell agreement. This option guarantees cash in a lump sum at the exact time it is needed by the surviving or healthy co-owner(s) to purchase the business interest from the disabled co-owner or the deceased co-owner’s estate.

Insuring protection
A buy-sell agreement, paid for by insurance, creates liquidity for the business interest, and reduces or eliminates loss of business value that can occur as a result of a forced liquidation or failure in the aftermath of an owner’s death or disability. It can also help reduce the risk of disputes between the surviving owner(s) and the deceased owner’s heirs, and ensure the continued operation of the business. The buysell agreement may also be struc-Insurance Solutions tured to provide insurance proceeds in the event of death or a critical illness of a co-owner who is a “key” person to help reduce business debt and offset expected reductions in sales revenue. Business owners should plan ahead to avoid disaster. We can help ensure your business has the proper insurance coverage in order to eliminate uncertainty and confusion about the inevitable change of business ownership.