If your partner died tomorrow, who would you be in business with?
Most partners never ask that question until they have to. Without a plan, a partner's shares usually pass to their family. That can leave you running the company with a grieving spouse who never wanted the job, or scrambling to find the money to buy them out. A little planning now makes that day far less messy.
The two pieces
1. A buy-sell agreement. It lives in your shareholder agreement, drafted by your lawyer. It spells out what happens to an owner's shares if they die, become disabled or leave, and how the price gets set.
2. The money to make it work. The agreement is a promise. Life insurance is how you keep it. When an owner dies, the payout funds the purchase of their shares. Their family gets fair value quickly, and the remaining owners keep the company.
What about key people?
Sometimes the person the business can't lose isn't an owner at all. It's your top salesperson, your lead estimator, or the one person who knows where everything is. Key person coverage is insurance the company owns on that person. If something happens, the company gets cash to cover lost revenue, reassure the bank, and find and train a replacement.
How we work through it
- 1We talk through who the business depends on and roughly what the shares are worth.
- 2Your lawyer and accountant choose the structure. Who owns the policies changes the tax result, so that part is theirs.
- 3I shop several insurance companies for coverage that fits the agreement.
- 4We review it as the business grows, so the coverage keeps pace with the value.
Is this a fit?
Usually a good fit
- Two or more owners
- A business that leans on one or two people
- A bank loan or line of credit you've personally guaranteed
Probably not yet
- A solo business with no plan to keep running after you. Your personal coverage matters more there.
The honest fine print
- Coverage that fit the business five years ago may be far too small today.
- An agreement with no insurance behind it is a promise with no money behind it.
- Premiums for this kind of coverage generally aren't tax-deductible.
Questions to take to your accountant
- 1.Should the company own the policies, or should we own them on each other?
- 2.How is the share price set, and how often should we update it?
- 3.Does our agreement cover disability, not just death?
FAQ
My partner and I are good friends. Do we really need this?
Especially then. It keeps the friendship, and your partner's family, out of a negotiation nobody wants to have while grieving.
What if one of us can't get insured?
It happens. There are options, from other insurance companies to building a cash reserve. Let's talk it through.