If your business entity has multiple owners, it is important to have a buy/sell agreement describing what happens following the death or disability of one of the owners. Typically, the agreement provides for the mandatory or optional buy-out of the deceased/disabled owner’s interest in the business.
- Often life insurance owned by the business or by the other owner can be an important tool to assure the availability of liquid funds to purchase the ownership interest of a deceased owner.
- In the absence of life insurance, the purchase price for the deceased owner’s interest will need to come from the operating income of the business; this may put a big strain on the cash flow of the business.
- Although disability buy-out insurance is available, it often is very expensive. For that reason most buy/sell agreements provide that the ownership interest of a disabled owner is paid for over a number of years with the payments coming from the operating income of the business.
- The goal in planning is to balance the need of the deceased/disabled owner to be bought out with cash as quickly as possible against the need of the remaining owner to continue to operate the business profitably.
We can help you sort out all of the complex issues associated with planning for business continuity following the death or disability of a business owner.