Besides being a full time financial advisor, I also own a few businesses. My passion is in consulting and guiding business owners on financial matters, my help therefore comes from an experiential base rather than a solely theoretical one.
When starting and running a business, it’s very easy to get bogged down in day-to-day things like staff management, market sourcing, development, etc. Likewise, when you are juggling your family life and prioritizing the health and development of your children, it is easy to forget about some of the seemingly peripheral issues that are of paramount importance to your business.
Over the next three posts I will be discussing three vitally important financial topics that every business owner needs to know. I’m going to start this post discussing the importance of having Buy & Sell and Share Buy-back policies in place.
This is a policy that would be used for any situation in which there are more than one owners in a business. Each partner owns a share in the business and that share has a value.
In the event of the permanent incapacity or death of one of the partners, the remaining partners would have first right on the now unavailable partner’s shares. Provided the partnership agreement is structured accordingly – unless those shares are to be distributed according to the instructions in the last will and testament, but then all partners need to accept these wishes or there could be potential troubles down the line.
Having a Buy & Sell contract and the supporting policies allows the remaining partners to purchase the shares from the disabled partner or, in the event of death, from their estate. This is important because it allows the beneficiaries of the estate (usually spouse, children or family members) to receive funds to the value of the shares. It sets a value on the shares and provides the remaining partners with the liquid capital needed to acquire the shares without any delays.
Each partner would need to take out a life and accelerated disability policy on the other partners life, in a proportionate ratio of cover to shares.
If a partner passes away without such an agreement and policy portfolio, then the company could suffer because the shares of the late partner being held up in the execution of the estate. Therefore, the partner’s family could suffer as a result. In the event of a permanent disability, the now disabled partner may not have the funds available to modify their lifestyle to meet the new affliction.
This is a similar concept as the Buy and Sell, but is suited for trustees of a trust. The trust owns the shares and purchases them back from the trustees in the event of the permanent disability or death of one of them.
Instead of the partners owning policies on the other partners, as in the buy & sell, the share buy-back sees the trust taking out policies on the trustees.
By Stephen Hughes, Financial Advisor
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