Is there a way to protect your business from the effects of the death, disability, or divorce of a co-owner?
When you went into business with a co-owner or co-owners, you entered into a legal arrangement that combined your resources and skill sets…and also, to some degree, your fortunes and misfortunes. We can’t always plan for the surprises that lie on our life’s path, but there is a brilliant legal tool which can help your business avoid disruption when calamity strikes your life, or the life of one of your co-owners.
A buy-sell agreement performs three essential functions with efficiency when disaster strikes:
- Identifies how the departing co-owner’s interest in the business will be reassigned;
- Converts the ownership interest into a liquid asset for easy transference;
- Resolves legal inquiry about the true dollar value of your business.
Let’s consider each:
- Reassignment of a co-owner’s interest: When a co-owner leaves the business for whatever reason, a decision must be made about the redistribution of the co-owner’s share. The interest may be divided equitably or by percentage among the remaining co-owners, or it may be transferred to the co-owner’s heirs, or it could be offered for purchase to a third-party. Unless you like thrills and chills, knowing what will happen to the co-owner’s interest will go a long way toward relieving anxieties!
- Establishing the liquidity of the business interest: When the buy-sell agreement is funded, possibly with life or disability insurance, funds can quickly become available to satisfy payout requirements and taxes. There are several ways to fund a buy-sell.
- Determines the precise value of the co-owner’s business interest: The tax man and sometimes the courts will need to know the exact dollar value of the co-owner’s interest. A business valuation will be required to identify the business entity’s value, based on one of several formal court-approved valuation processes.
Frankly, the last thing you want is to wonder who will receive the departing co-owner’s interest in the business, how the value of that interest will be funded, and have uncertainty about the precise dollar value of that portion.
When a co-owner is deceased, or must leave the business because of disability, divorce, bankruptcy, or retirement, having a premeditated agreement that clearly describes the expectations of the remaining co-owners will help keep your business running efficiently during a time of difficulty and stress. Forethought and good planning will help your business weather the changes that are likely to come sooner or later.
Because life is filled with uncertainty, schedule a visit with a Certified Financial Planner® (CFP®) who will help you safeguard the financial security of your business.
It all starts with a conversation. Please call me and let’s schedule a complimentary meeting.
Joseph M. Maas, CFA, CVA, ABAR, CM&AA, CFP®, ChFC, CLU®, MSFS, CCIM
Synergy Financial Management, LLC
701 Fifth Avenue Suite 3520
Seattle, Washington 98104