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Why is a buy-sell agreement necessary?

 

The buy-sell agreement is the document that spells out how the business will function without you.  It’s a contract that enables the remaining owners, or your heir, to purchase the business interest of any co-owner who dies, becomes disabled, or retires.

Case study:

Three business partners had a buy-sell agreement with a common redemption agreement  – this means that if one partner die, the company would buy out the share belonging to the deceased partner. In addition, each individual partner personally owned insurance on each of the other partners.

In this case, the problem was there was nothing in place that required a surviving partner to deliver cash from the insurance proceeds to the company so that the company could complete its obligation to buy the deceased partner’s share. When a partner did end up dying, one of the remaining partners refused to give the death benefit to the person leaving the company, the estate of the deceased is short of cash, and their partner way ahead of the game.

It may take three to four years to settle this case in court. Until the case is settled, one partner is left in a good situation, and all three (including the estate) are dealing with litigation and large legal fees. This case serves as an example of how important it is to do continual reviews to prevent these sorts of issues prior to them occurring.

Different forms of buy-sell agreements: 

Entity Buy-Sell Agreement:

  • The business itself enters into a written agreement with the owners to purchase the interest of each individual owner. The individual owners agree to sell their respective interests to the business in the event of disability, death, divorce or departure of a co-owner. This approach may be appropriate if you’re a:
  • Smaller business taxed as a partnership
  • Business with multiple owners and large age differences, or different ownership percentages among their owners
  • Business wishing to own and control the insurance funding.

Cross-Purchase Buy-Sell Agreement:

  • The individual owners agree to purchase the interest of the other owners. Each individual is the owner and beneficiary of a life insurance policy on each of the other owners, and the policy proceeds are used to pay the purchase price. This approach may be appropriate if you’re a:
  • Business with fewer partners/owners
  • Business owners who are close in age
  • Business with owners who are willing to personally own and pay for the insurance.
Buy-Sell Agreement Using Partnership Administration Succession Strategy (PASS):
 
  • Under this arrangement, the individual owners form a separate partnership, and the partnership acquires life insurance policies on all the owners and administers the provisions of the buy-sell agreement. This approach can be very advantageous
Buy-Sell Agreement Funding:
 
  • A buy-sell agreement is the foundation of a business succession plan, but you have to know where the money will come from or the plan can’t be implemented. There are only a couple of ways to fund a buy-sell agreement:
  • Cash. Unfortunately, cash is not always available when you need it most and depending on your business, you may need a large amount.
  • Sinking fund.  With this method, you set aside funds for the eventual purchase of the business, but what if something happens before you have all the funding?
  • Borrowed funds or installment note.  You can always work with your bank to borrow the funds to purchase the business.  However, the death, disability or retirement of a co-owner may affect your ability to obtain credit.
  • Life insurance.  For many business owners, insurance can be the most cost effective option. Note that the cost and availability of insurance can vary based on age, health and benefit amount, and may contain exclusions, limitations, reductions, and certain requirements.

What’s next?

 Evaluate your accounts with a Lions Assurance Financial advisor to learn about more business planning costs and opportunities that will benefit you and your company. Lions Assurance Financial helps executives and businesses, together with their tax and legal advisors, develop the optimal financial solutions for success.

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LIons Financial

Ariel Tavor

Principal

Ariel Tavor is the Founder and Principal Managing Director of Lions Financial. His agenda for Lions Financial is to provide his clients a service that maintains the highest professional value. Specializing in the Business-to-Business market has allowed proficient expertise in providing ongoing consulting services in the focus areas of business advisory, capital markets, and risk management. Ariel works with CEO’s, Capital Investment funds, and Boards of Directors where he advises his clients in matters of Executive compensation, Business Plan Design, Mergers & Acquisitions, Due Diligence, and Asset Financing.

Ariel has 10 years of experience in the financial services industry. He has worked in insurance and investment companies to analyze client’s financial and make suggestions on allocations based on defined objectives as well as maintaining long term relationships. Ariel’s comprehensive experience has allowed him to work closely with CEOs of companies and their executive teams from diverse industries such as trucking, hospitality, commercial real estate, Insurance, manufacturing, and technology. He has helped lead companies through the challenging decisions around – Buy-Sell Agreements, Deferred Compensation, Employee Group Benefits, Succession Planning, Mergers and Acquisitions, Valuations, and Business Sales.

Ariel currently oversees their family office investment group and sits on the Board of Directors of several companies and real estate developments. Their Investment group controls a portfolio of companies in multiple industries. They collaboratively have holdings in companies specialized in – Automotive Distribution- Real Estate Asset Management- Corporate Travel- Ink Mailing Manufacturing, E-Commerce, Financial Services, Management Consulting, Enterprise Technology, and Food Concepts. In recent years there has been a transition into fund allocation towards limited partnership investments in Venture Capital, Private Equity, and REITS within individual underwriting opportunities.

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Ariel Tavor is the founder and principal managing director of Lions Assurance Financial. His agenda for Lions Assurance Financial is to provide his clients a service that maintains the highest professional value. Specializing in the business-to-business market has allowed proficient expertise in providing ongoing consulting services in the focus areas of business advisory, capital markets, and risk management.

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Lions Assurance Financial is a highly successful, independent business consulting and wealth management advisory firm that focuses on three key areas of the financial industry: business advisory, capital markets, and risk management. The experienced team at Lions Assurance Financial focuses on serving the business and wealth management needs of privately owned business generating 3-50 million in revenue including independent business owners, family owned businesses, and business partners. Lions Assurance Financial works with capital providers including investment banks, private equity firms, venture capital firms, capital advisory firms, accredited investor platforms, commercial banks, and speciality finance firms.​

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What is the fundamental difference between a buoyant company and a not-so-good one, when all the factors are the same?
The reply is simple- expeditious actions. It is the outcome of the ability to form an idea about the situation, find a perfect response,
and then act accordingly. And all that, without an iota of hesitation. Companies that belong to the second group are known to lack this decisiveness, which sprouts from an absence of clarity in vision or rather the faculty of processing the steps mentioned above.​

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An effective risk management consultant will help individuals and organizations evaluate their risks and develop a plan to counter their losses. Risk management is a complex process, and there is no one-size-fits-all process that all consultants can use. However, there are certain conventional methods that a consultant will use to help you protect your organization from risk. A risk management consultant should be capable of identifying the unique risk that your business is exposed to and carefully evaluating the scenarios. One of the most critical steps in the risk management step is to discover and list all the expected and unexpected risks. There are various advisory firms that can help you mitigate risk and take care of your business’s financial aspect, but one firm that stands out from the rest is Lions Financial. The company is an independent financial services & business advisory firm based in New York. In conversation with Ariel Tavor, Managing Director of Lions Financial. Lions Assurance Financial is a highly successful, independent business consulting and wealth management advisory firm that focuses on three key areas of the financial industry: business advisory, capital markets, and risk management. The experienced team at Lions Assurance Financial focuses on serving the business and wealth management needs of privately owned business generating 3-50 million in revenue including independent business owners, family-owned businesses and business partners. Lions Assurance Financial works with capital providers including investment banks, private equity firms, venture capital firms, capital advisory firms, accredited investor platforms, commercial banks, and specialty finance firms.