Buy-Sell Agreements: Much more than just life insurance
As a financial planner with expertise in both investment and insurance planning, I get the opportunity to see a lot of what other financial professionals are doing. From my observation, most advisors focus on either investments or insurance, but they may do a little of the other. Some advisors do both, but it’s more common to see an advisor develop expertise in one or the other and focus on it.
Regardless of their expertise, when it comes to buy-sell succession planning for business owners, the first word that comes to mind for most planners is life insurance. This is because most advisors have been trained and conditioned to look at business succession planning as an opportunity to sell life insurance. It’s true - everyone is going to die. And you can use life insurance for multiple purposes: estate tax, income tax, asset protection, and business succession planning. However, it is a fool’s errand to simply go out and buy life insurance and then think that your business is ready for anything and everything under the sun that could adversely happen. Yet, it happens so much more than you think. Most advisors are completely content with selling you life insurance and calling it a day when it comes to planning for the future of your business. And if you already have life insurance? Great, that means you don’t need their help planning the future of their business. Just give them your IRA, plug in some useless computer projections about 25 years from now, and your plan is done. What nonsense.
What are the odds you die prematurely? Social Security publishes a mortality table each year that calculates your probability of death based on your age. For the 50-year-old business owner, there is a less than 1% chance that they will die in 2023 and any given year in each of the next ten years. Don’t get me wrong, it’s great to have a plan for determining what happens if you die prematurely. But what about the 99% chance each year that you live? Let’s focus our planning on that. I prefer optimism. But I also like math. Here are some of the things that can adversely impact a business that are more likely to happen to a business owner than premature death:
Disability - Car crashes, hospitalizations, neurological conditions, complications from respiratory illnesses (such as Covid), heart attacks, complications from diabetes, mental illness, drug/alcohol problems, and chronic back problems are some of the most common examples. Will they stay on salary? Who will pick up the slack? What if they refuse to sell their shares? These are all things to consider here.
Divorce - While the divorce rate is the lowest it’s been in decades, just under half of all marriages still end in divorce. And even if you are confident it won’t happen to you, what about your business partner? Do you really want to be in business with an ex-spouse? Without an agreement in place, you could wind up in business with someone who has no clue about your business. Or worse, you could have a new silent partner that constantly pesters you (along with their legal counsel) about when the next distribution to shareholders will occur.
Deadlock - What if you and your partner have a falling out? There is nothing worse than two or more people with equal claims to a company that are not on speaking terms. It gets old fast, and without a plan in place, things can get destructive quickly. Fortunately, this type of issue can be taken care of with proactive planning while the skies are sunny and clear.
Loss of License - What if a partner in the business loses their professional license and can no longer practice? It’s much better to have this addressed on the front end because if your business documents don’t spell things out, you may have no recourse.
Missing Person - When a person is missing, they’re not dead. It’s as if they went to lunch and didn’t come back, and you’re perpetually waiting on them to walk through the door. This one might be rarer than premature death, but it has happened to very successful businesses before. Why not go ahead and address it in the plan?
Quit - What happens when a partner inherits a small fortune, wins the lottery, or simply dips out? Without any formal agreements in place, things are a lot like they are for a missing person - stuck in limbo.
Imprisonment - This is another one that happens more than you think. Should the partner be forced to sell at a firesale price? Should they be forced to forfeit their shares or simply transfer them to a family member or trusted person? There’s no right or wrong way to do this type of planning - other than to not address it at all.
Bankruptcy - There are multiple considerations here with the financial aspect being the most obvious. Again, it is better to have a plan on the front end. Otherwise, your options might be extremely limited.
Retirement - Oh, yes. My favorite one. “Don’t kill me off… I just want to walk away and enjoy the rest of my life without hassle... I want to monetize what I’ve worked so hard for and not have to take another phone call... I know who can run the business but I have no idea how they’ll come up with the money... I’m ready to put my business up for sale but it isn’t ready for sale… I just hope the government doesn’t tax a big chunk of it.”
At the end of the day, there are no right or wrong ways to plan. It is all about flexibility and doing things the way you want on your terms. If you can relate to any of these items… maybe we should talk.
