Nate Collins is a Financial Advisor at Raymond James and a Certified Exit Planning Advisor (CEPA®). He works with a select number of business owners and their families to help achieve their financial goals. Nate provides in-depth tax-mitigation strategies and estate planning, as well as comprehensive family-office services. He helps owners understand exit readiness, maximize wealth transfer, gain family alignment, and prepare for “life after exit.”

nate.collins@raymondjames.com
203.635.5420

BUSINESS OWNERSHIP

How life insurance underpins an effective buy-sell agreement.

Buy-sell agreements, underpinned by life insurance, are critical tools for ensuring business continuity and smooth ownership transitions when certain events like the death or disability of a business owner occur. Life insurance provides the necessary financial means to support these agreements, guaranteeing that the business has the funds to manage ownership changes without fiscal strain.

Exploring the Four Types of Buy-Sell Agreements

Each type of buy-sell agreement serves a specific purpose and suits different business structures and owner situations. Understanding these can help business partners choose the best fit for their needs.

• Cross-Purchase Agreements: Here, each owner purchases a life insurance policy on the other owners. If one owner dies, the surviving owners use the insurance proceeds to buy the deceased’s share at a pre-agreed price. This type is ideal for businesses with a few owners since it ensures that each has a direct stake in the continuity of the business.

• Entity-Purchase Agreements: Commonly known as "stock redemption" agreements, this arrangement involves the business itself buying life insurance on each owner. The business is the policy owner and beneficiary, using the proceeds to buy back the deceased owner’s share from their estate. This simplifies the process in businesses with many owners and eases administrative burdens.

• Wait and See Agreements: This hybrid approach combines elements of both cross-purchase and entity-purchase agreements. Initially, the business has the option to buy the shares, and if it chooses not to, the remaining owners have the option to purchase. This flexibility makes it suitable for businesses where future financial scenarios and tax considerations might influence the choice of buy-sell method.

• One-Way Agreements: This type is used when there is only one likely buyer, such as a key employee or even a family member. The buyer owns a policy on the life of the owner and has the right to purchase the business interest upon the owner’s death. This is particularly useful in sole proprietorships or family businesses where the transition is planned to a specific individual.

Appropriate Circumstances for Using Buy-Sell Agreements

These agreements are essential in any business with more than one owner. They prevent the business from falling into the hands of outsiders or uninterested heirs, ensuring that the ownership remains among those who are actively involved in and committed to the business. Furthermore, they provide:

• Non-dilution of ownership: They keep the ownership within a closed circle of current owners or specified successors.

• Assured business continuity: The immediate availability of funds from life insurance ensures the business can continue operating smoothly without the need to liquidate assets.

• Equitable and efficient settlements: Life insurance proceeds provide a quick and fair means to compensate the estate of the deceased, ensuring all parties are treated justly without financial complications.

Integrating life insurance into buy-sell agreements ensures that businesses can manage transitions seamlessly by providing immediate liquidity and clear directives for ownership changes. Business owners should consult with legal and financial advisors to select the type that best suits their structure and goals, considering the unique dynamics of their business operations and owner relationships. Proper planning with the right type of agreement can secure a business’s future and provide peace of mind for all stakeholders.

Contact Nate Collins at nate.collins@raymondjames.com to discuss your business continuity plans.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nate Collins and not necessarily those of Raymond James.

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Donors are urged to consult their attorneys, accountants, or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes.