Every show, for many years, has focused on personal planning. Well, planning for your business or professional practice is an important part of your estate planning. For many, their business is their largest asset and only source of income.
Most people think a business buy/sell is an insurance plan to buy their shares back on death. Is that all there is to it?
That is, in fact, what most people think and it is a very dangerous misconception. If we can get one point across today, it is that a buy/sell, especially one only addressing death, is never enough for any business. Every business owner needs to address a broad range of issues and to do so in a comprehensive agreement. Consider:
Let’s look at the basic insurance buyout in the event of death. How does that typically work for a closely held business?
Partner A buys an insurance policy on Partner B and vice versa. Whoever dies first, the surviving partner will receive the life insurance proceeds and be obligated by the buy sell contract to buy the deceased partner’s shares.
OK, so it can be simple in many cases on this point, but how do you set the price?
Great question, and it is often not an easy answer. Some people think if they are young and healthy they can just set a high number because the life insurance is cheap. But, if one of them gets divorced, the ex’s attorney will likely argue that is the value of the business, too. The best approach, although costly, is to have the business appraised and create a formula you can use that adjusts for changes in the economy or business. A less costly approach, is to have your regular CPA create something simpler without as much detail or analysis. A common approach, is for the partners to meet once a year and set a price for the next year. This works great (in theory) and is cheap, but, too often when they need the figure for a buyout, it hasn’t been updated in years or worse.
What about disability?
This is too often overlooked. Partners should probably have their own personal disability income replacement insurance. The benefits, like salary continuation from the business, can be dovetailed with the personal coverage. Consideration should also be given to and instance when disability is so significant or permanent that the shares should be repurchased.
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