FFM - Business Continuation Strategies

“Today, small business owners invest their time, efforts and labor into making their business succeed. And although these energies provide an income and family benefits now, they need not cease when the owner retires or dies. Therefore, we generally recommend - especially when there are two or more shareholders - that a Buy-Sell Agreement is created and funded. It's a fairly easy process and provides a great piece of mind.”

Mark R. Fielder
President, FFM, LTD.

What is a Buy-Sell Agreement Anyway?

A Buy-Sell Agreement is simply a written agreement made between the partner or shareholders of the business specifying buy out provisions caused by such things as death, disability, divorce, bankruptcy, voluntary termination, company dissolution, etc.

The amount of the buy out will be based on some type of valuation model, peculiar to that operation of business.

Buy-Sell agreements should always be in place and funded BEFORE the commencement of operations. Yet for some unknown reason, this is rarely the case.

Why A Buy-Sell?

The execution of a Buy-Sell Agreement secures a number of very tangible benefits for the shareholders, including:

Continuity of management and control for the remaining owners

A ready market for typically non-marketable business interests

Liquidity to the decedent's estate for estate taxes and administration costs

A fair valuation of the business interest for federal estate tax purposes

A fair return to the decedent's estate for his/her business interests

Three Basic types of Buy-Sell Agreements

The three basic forms are each distinguishable by the purchasing party.

The following links are designed to BRIEFLY discuss and illustrate the important elements of each method. This information offers a very general overview of Business Continuation agreements and is not meant as legal advice.

Stock Redemption Plan

In a Stock Redemption Plan, the corporation promises to purchase the departing shareholder's interest in the business.

A Cross Purchase Plan

In a Cross-Purchase Plan, it is the individual shareholders that agree to buy, usually but not necessarily pro rata the business interest.

A Wait & See Buy-Sell Plan

The Wait & See Buy-Sell Plan is a hybrid that allows the corporation and its shareholders to delay the purchase decision until the time of buyout.

Regardless of the form selected, the Buy-Sell Agreement establishes for the shareholders the terms of the purchase, including the events that trigger a purchase, the method of valuation, and most importantly, the buyout funding mechanism.

Funding a Buy-Sell

Obviously, careful consideration must be given to the funding aspect of this buy-sell equation. Many factors point to the use of life insurance in funding Buy-Sell Agreements, including the following:

Premium payments provide funding for a death-triggered buyout

The buyout is funded with discounted dollars through the use of the death benefit

Life insurance proceeds may be received federal income tax-free

Cash value policies may provide funding for living buyouts and, if properly structured, may be accessed federal income tax free*

Cash value policies with an increasing death benefit option may provide death benefit funding that increases along with the value of the successful business

Action To Take

As with any investment, business planning or estate preservation product and strategy, it is wise to consult with professionals in the field.

If you are new to these ideas and unsure which Agreement you should review, please contact us at 1-800-480-7526 or if you would like to learn more on Buy-Sell Agreements, please click HERE.

FOR FASTER, PERSONALIZED SERVICE CALL 1-800-480-7526.

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*Potential tax-free income assumes (i) properly structured withdrawals to tax basis and policy loans thereafter, which will reduce policy values and death benefits, (ii) the policy is not a Modified Endowment Contract as defined in Internal Revenue Code Section 7702A and (iii) the policy remains in force until death. Loans and withdrawals may reduce the policy values and death benefit.

Please note: This material is not opinion or advice on legal or tax matters, for which only private counsel may be responsible.

Securities are offered through Girard Securities, Inc. member FINRA, SIPC.
Mark R. Fielder, Registered Principal. CA. Insurance Lic. # 0690576.