Lots of words have been written about the buy-sell agreement. But little has been said about the significant role the field representative can play in the buy-sell process.
The buy-sell agreement is, of course, the legal contract between co-owners of a business that defines how ownership interests will be bought and sold in the event of specified events, like death or disability. Typically, two key advisors in this process are the attorney who drafts the legal agreement and the accountant who deals with issues like business valuation and tax consequences.
Arguably, the insurance representative is in the best position to create the vital link that connects the tasks of the attorney and accountant to his or her own client responsibilities — all in a way that meets the present and future needs of the co-owned business.
Consider, for example, a discussion with a business client regarding benefits strategy. Here’s where the representative and the client determine the valuable role that benefits can play in attracting, rewarding and retaining the exceptional people who create the success of the enterprise.
Characteristically, this discussion begins with talk about traditional benefits for all. From there, the conversation turns to the need for additional benefits for executives and key employees. At the top of the ladder, the discussion on benefits strategy addresses the owners themselves. Gradually, the conversation turns to buy-sell agreements –before the accountant or attorney has come to the table.
The insurance rep should thus be at the ready with a general knowledge of buy-sell agreements that goes beyond how a life insurance product fits into the equation. The following are some key points to know.
Why one is needed
? Create a market for the owner’s business interest;
? Provide for a mutually agreeable price and terms;
? Facilitate a smooth transition of management and control of the business interest;
? Assure the owner that the surviving family’s future is not dependent on the business;
? Provide liquidity to pay estate taxes and settlement costs;
? Help establish the value of the business interest for estate tax purposes; and
? Reduce the potential for discord and litigation.
When one is needed
It’s not for nothing that buy-sells are often called “business pre-nups.” Every co-owned business should consider one the moment the business is formed or as soon after as possible. In fact, a company increases its financial risk every day value is added to the business without a plan for future transition.
This fact is precisely why the representative is in a good position to raise the matter with a client during early discussions regarding other issues or during annual policy review and update meetings.
The two most common forms of agreements are cross-purchase and entity-purchase (or stock-redemption) plans.