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If one or more business partners becomes disabled... • Would they want to sell your share of the business? • Would they want to buy out the partner? • How would the price be determined? • Where would the money come from? • Is it guaranteed to be there when it’s needed?
What are the odds ... Source: 1980 CSO, 1985 CIDB Table B
Consider the likelihood... 1985 Commissioner’s Individual Disability Table B - Equally Weighted 90 Day Elimination Period.
In the event of a disability, there are many issues to be resolved The disabled partner may: • Become a drain on income while not contributing to the business • Have different priorities for the business income and profits and may not want to reinvest profits • Decide to let spouse or relative take over their role in the business
In the event of a disability, there are many issues to be resolved The healthy partner: • May not be able to pay the disabled partner an income and maintain the business • May not have funds to buy the disabled partner out • May not want to share business decisions with the disabled partners family
A properly funded buy-sell agreement betweenowners will address these issues.
Funding alternatives... • Current cash flow • Establish a sinking fund • Borrow the funds • Disability Buy-Out insurance
The most practical solution is... • A written agreement that specifies when and for how much the buy-out will take place, and... • is funded with the right amount of Disability Buy-Out insurance.
Primary types of buy-sell agreements • Cross purchase • Entity purchase
Insurance Company Cross Purchase Agreement... Buy-Sell Agreement Business Owner A Business Owner B Premium Policy and Disability Benefits on Owner B Policy and Disability Benefits on Owner A
Entity Purchase Agreement... Buy-Sell Business Owner A Agreement Buy-Sell Agreement Premium Policies and Disability Benefits on Owner A & B Insurance Company Owner B
Advantages of an agreement... Disabled Owner • Assures a definite price and buyer • Financial future is no longer contingent on business success
Advantages of an agreement... Healthy Owner • Avoids negotiation of price • Assures complete and orderly transfer of ownership • Retains control of the business • Provides continuity and credibility for customers and creditors
What will be provide to you • Assessment of the current program • Sample Agreements • Design options • Cost Benefit Analysis • Implementation steps
All we need is the following • Current financial information • Copy of any current agreements and/or funding • Owner’s date of birth, percentage of ownership and health information