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Buy & Sell Partnership Insurance Agreement

You chose your business partners carefully.

Partnership Insurance AgreementThere’s nothing quite like the strength of a good business partnership. When the chemistry is right, and you’re practically finishing each other’s sentences, working becomes a real joy. With your combined skills, the company’s strength is much more than the sum of its partners.

How would the death of a partner affect the life of your company?

But what would happen, should one of the partners die? Not only would you have to deal with the grief of losing a friend and partner, you would also have to assume additional responsibilities in operating the company.

And then, when you can least afford to worry about it, you and your company will be required to settle with your partner’s estate. In most cases, the partner’s family has been counting on that income, and has a right to expect either further income, or a settlement.

If you haven’t planned properly, you may be faced with an impossible choice: either invite members of your partner’s family into your business, or pay the value of the shares to the estate.

The importance of a well structured Buy-Sell Agreement.
Everyone goes into a partnership optimistically. But, of course it pays to be prepared for a number of possibilities. A good Buy-Sell Agreement outlines, in detail, plans for what a company will do in situations such as death of a partner. But a good Buy-Sell Agreement would spell out not only what actions the company will take, but how it will carry them out.

A realistic funding plan for a Buy-Sell Agreement is important. What’s your best option?
It’s one thing to have a Buy-Sell Agreement, but its quite another to have a workable plan in place should one of the partners be required to enforce the agreement. Essentially, there are three ways to fund a Buy-Sell Agreement: cash, loan, or life insurance. Let’s consider the relative merits of each.

OPTION 1:
Paying cash or liquidation assets.

Cash requires that the company has sufficient liquid assets available to fund the buyout. In a partnership of two people, it would mean having an amount equal to half the value of the company. Is that realistic for your company?

Let’s say you and a partner are owners of the ABC Company. The company has a value of $1 million. If your partner died, you would owe the estate $500,000. Could such a payment be made, even over a five year period, without causing great difficulties for the company? And if you were forced to liquidate assets, could you get a fair market price?

OPTION 2:
Obtaining a loan.

If adequate cash isn’t on hand, perhaps the company could apply for a loan to cover the value of the shares. But look at it from a lender’s point of view.

The company has just lost a significant person. It may require a major re-organization. Perhaps other partners will be brought into the business. Would a lender look favourably on providing a loan to a company at this time? Even if a loan could be secured, what would the interest costs be? And would it be a hardship on the company to make the payments?

OPTION 3:
Life insurance funding.

A life insurance policy for each partner can be put into place to cover such events. If a partner dies, the Buy-Sell Agreement will be exercised in an efficient manner using the proceeds of the life insurance contract. Since the terms and amounts have been agreed upon beforehand, there are no major last minute decisions to be made. The funds will be there, and the company can continue to operate.

What price do you put on peace of mind?
The best way to deal with any emergency is to be as prepared as possible. The death of a partner will be difficult enough without the burden of worrying how shares will be paid for.

Of the three methods available for buying out the shares, only life insurance allows you to plan ahead. Calmly. Rationally. Between partners.

Speak to Quattro Insurance Solutions about your Buy-Sell Agreement
If you already have a Buy-Sell Agreement, perhaps it’s time for you and your partner to evaluate its terms and provisions.

If you don’t have one, it makes sense to speak to your lawyer and accountant. There are many ways to tailor a Buy-Sell Agreement to suit your specific needs. The same holds true for the insurance that’s put into place to successfully exercise the agreement.

We can show you flexible ways of arranging ownership of the insurance policies, along with provisions for long term disability. Get complete details today.

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