CEO Prosperwell Financial, Wealth Advisor RJFS.
Have you considered what needs to be done with your business when you are doing your estate planning? If you own a business, it is important to have a management succession plan and also have a buy/sell agreement for your business interests.
You worked years to build your business, through tears, sleepless nights, stress and myriad emotions. Many days feel completely like a roller coaster. Sometimes you are so busy working in the business that you may forget to work on the business. Having a succession plan in place will make sure your strategy for your business can remain intact if something were to happen to you. You want to protect your asset (your business) and have a plan in place if there is a divorce, change in partners, death, acquisition of a business or sale.
A buy/sell agreement is a legally binding agreement between co-owners of a business that governs the situation if a co-owner dies or is otherwise forced to leave the business, or chooses to leave the business.
A buy/sell agreement should generally be funded by life insurance. You could use whole life insurance, which is insurance that is more expensive but covers someone for their whole life, or term insurance, which is just for a set period of time. For example, you can take out a 20-year policy for $4 million. That means that if your business partner passes away within those 20 years, you end up with $4 million. This may seem like a lot of money, but it depends on the valuation of your business and what the partner does for you in the business.
There are many different types of life insurance you could put in place. Term insurance generally is the least expensive and most widely used option. On top of this, it’s important to analyze the amount of insurance you may need and manage your personal and business investments. Start by getting quotes from various insurance companies and retirement providers to help inform your ultimate decision, or look to an independent wealth advisor to help you make the best decision possible.
If you choose to work with a wealth advisor, ask for their advice on all the different types of insurance. They can likely do an insurance analysis to see how much you’ll need as well as help you get everything in place.
Keep in mind it is generally best for the parties involved in a buy/sell agreement to have their wealth advisors work together. Have open discussions on succession planning, but do still get your own legal and financial counsel to make sure it is a successful transition for you. As an example, a client of mine hired a consultant to advise the seller and the buyer. They then each had their own attorneys work through the legal documents to make sure everyone’s interests were intact.
You might also find it helpful to work with a CPA to help you navigate the taxes associated with buying and selling a business. I have a client I was helping through their business sale, and taxes take such a huge amount it sometimes makes the sale less enticing. It is extremely important to look at your cash flow, do projections and completely understand all the ramifications (good and bad) of a sale.
Another reason having a buy/sell agreement in place is important is in the case of divorce. I’ve helped a number of business owners through the divorce process, and having a buy/sell agreement and a plan in place was extremely helpful in facilitating a divorce settlement. Divorce is never easy. Divorce can be extremely difficult if you own a business. This is even more of a reason to have a succession plan in place.
I know we get so busy running the business we forget to think about succession planning. But I believe we really forget about it because we think we will live forever and we also don’t want to think about dying. But, just like you set up a will, trust or healthcare directive for your family, you want to set up things correctly to protect your business now and in the future.
Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The cost and availability of life insurance depend on factors such as age, health and the type and amount of insurance purchased. Guarantees are based on the claims paying ability of the insurance company. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Prosperwell Financial is not a broker/dealer and independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.
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