Buy-Sell Case Study - ABC Company
The Situation:
Andrew and Bill are equal partners in ABC Company. With the success of their business and the prospect of future growth, they are now at a stage where they feels a buy-sell agreement is required. This means if one of them dies, the survivor will have the funds to purchase the deceased's shares.
Based on financial statements, ABC Company is worth $400,000 today and projected to worth over $1 million within ten years.
| Shareholder | Ownership % | Fair Market Value Today | Projected FMV in 10 years |
|---|---|---|---|
| Andrew | 50% | $200,000 | $600,000 |
| Bill | 50% | $200,000 | $600,000 |
The Problem
How to fund the buy-sell agreement. Andrew and Bill need a cost-effective solution that meets their needs today, but is flexible enough to grow as the value of the business grows. They know there are different ways to fund a buy-sell agreement and they meet with their financial advisor to discuss the alternatives.
The Solution
Insuring each partner is determined to be the most cost-effective way to fund the buy-sell agreement. If one partner dies, the surviving partner would receive life insurance proceeds and use them to purchase the deceased's shares.
The Product Solution - Business Term and the Business Value Protector
| Shareholder | Basic Coverage Amount | Business Value Protector | Cost of Basic Coverage | Cost of Business Value Protector | Total Cost |
|---|---|---|---|---|---|
| Andrew | $200,000 | $200,000 | $22.69 | $3.59 | $26.28 |
| Bill | $200,000 | $200,000 | $28.44 | $6.18 | $34.62 |
Business Term: The Right Product
- Competitive initial and renewal rates guaranteed at issue
- Can be converted to permanent insurance plans
- Offers a diverse selection of features, plus additional benefits that can be added at, or after, issue as your business situation changes
- Multiple partners can all be covered within a single, low-cost, customized package
- Option Ryder allows you to lock-in the ability to purchase additional coverage based on the increased value of your business, without having to provide evidence of good health again
- Rewards your healthy lifestyle with significantly lower insurance costs
Is Your Business Prepared for the Sudden Departure of One of its Owners?
Without a Buy-Sell Agreement, you may be posting a "For Sale" sign.
Here's the problem...
If your business loses an owner, the remaining owners must decide how the business will continue. Generally, you have four options. You can close down the business, but you likely wouldn't want to after all the time, energy, and money you've put into it. You can continue the business with the new owner (for example, the spouse of the deceased owner), but do you want to be in business with this person? You can sell your shares, but who will buy them and at what price? Or finally, you can purchase the shares from the deceased owner's estate.
What are your options?
A formal buy-sell agreement covers the terms of ownership and operation of the business. It usually deals with the death, disability and retirement of one of the owners, as well as disagreements about running the business that reslut in an owner wanting out. The agreement often includes a formula or process for valuing the business to simplify the buy-out of an owner. Generally, the agreement deals with:
- who will buy the shares?
- when the sale will take place?
- what the purchase price will be?
- what the terms of the sale will be?
- where the money to buy the shares will come from?
The best solution
Proper funding must be in place to ensure the agreement is viable. Without funding, agreements can fall apart because the remaining owners, obligated under the terms of the agreement to purchase the departing owner's shares, may not be in a financial position to do so.
There are a number of ways to fund a buy-sell agreement. Consider your options:
- you can start saving today
- you can borrow the funds from a bank
- you can take the funds from current earnings
- you can sell assets, or
- you can purchase life insurance and disability insurance to provide the funds needed
Life insurance can be the most cost-effective solution to fund a buy-sell agreement when the owner dies. It guarantees that money is available when needed. What you get is peace of mind knowing things are taken care of. To find out more, contact an advisor at Horizon Planning Group.