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Locking in your business exit strategy with a buy-sell agreement and funding it with life insurance can create great certainty. The reason is that it will accommodate the continuity of your business in the broadest range of circumstances. Planning for your business continuation when you or your business partners exit is critical. It could mean the difference between business transfer becoming the capstone of your success or a slippery slope to financial demise.
Planning for Business Ownership and Control When a Partner Exits
If you're in business with a partner or several, you may wonder what would happen if something happened to them, or you. What about when or if one of you wants to leave, retires, becomes disabled or physically or mentally unable to continue, or passes away unexpectedly?
We’ve talked about how you can compensate the business for losing critical employees or owners with Key Man Insurance, but what about the business ownership going forward? Will the others continue in business, sell it, or bring in a new partner?
Maybe you’re the sole business owner at this point, but you hope to sell the business someday. If your business is built on your reputation, knowledge, and expertise, would a strategic handoff be better than an abrupt ownership change? Perhaps it would be better to hire well as a transition strategy. You might be able to transfer ownership slowly over several years, giving your client base time to build a relationship with the new guy.
What If You Don’t Have an Exit Strategy?
If you share the ownership of a company, your livelihood rests on the success of your business. How do you make sure your family prospers as your business prospers, no matter what happens to you or your business partner?
Contingency planning is one of those things that so many people put off because it’s not an immediate concern. According to LIMRA, in 2015, 75% of US small businesses haven’t been professionally valued, and 64% of US small businesses don’t have a business continuation plan.
But planning for how you sell or transition your business can mean the difference between peace of mind or turmoil. When your business continues after losing an owner without missing a beat, you’ll enjoy continued client relationships, revenue, and growing business value. You and your loved ones will be able to experience the financial rewards of everything you’ve built.
But if the business struggles and suffers, it could mean the inability to fulfill contracts, unhappy clients, dried up revenue, and declining business value. And this could cause financial strife for you and your loved ones.
It’s worth thinking this through and planning for contingencies to fully experience the fruit of your labor, no matter when or how you or your business partners exit.
Tools and Ideas to Plan Your Exit Strategy
In today’s show, we’ll discuss buy-sell agreements – what they are, what they do, and how they work.
We'll answer:
Why should I plan for how I’ll exit my business? Planning for how you’ll exit your business allows for the orderly transfer of the ownership interest when a business partner leaves the company. Why should I plan for how I’ll exit my business? Planning for how you’ll exit your business allows for the orderly transfer of the ownership interest when a business partner leaves the company. What circumstances should I consider in setting up a buy-sell agreement? A buy-sell agreement should cover any reason you or your business partner would exit the business. This includes retirement, divorce, disability, physical or mental incapacity, or death. What is a buy-sell agreement? A buy-sell agreement has two parts. The first component is a legal contract that outlines what happens with the business when one partner exits. The second element is a method of providing sufficient funding to purchase the business shares from the own...
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