We find that many of our clients who have buy/sell agreements in place either don’t have adequate coverage or, in the worst cases, the coverage required has never been implemented. I’ll say that again: 75 percent of the agreements we see are either unfunded or under funded.
This leads to expense, delay and, in many cases, litigation when one partner dies and the surviving spouse and heirs are suddenly trying to get a business appraised and fighting for what is theirs. This can lead to the untimely sale of the business or its assets, and really create a mess for the surviving partners. We want to avoid this and can avoid it with a simple insurance policy or two.
Here’s the simple self-assessment question I confront my clients with: If one of your business partners died today, would you have the liquidity to buy off his family, or would you be in court explaining to a judge why your business, representing 20 plus years of hard work, should not be sold?
If you died, would your partners be able, (let alone willing) to buy your family out in a manner that adequately respects your life’s efforts and contributions to the business?
If they can’t confidently answer yes to both questions, you need to do some work on their behalf.
Even in cases where the agreement is in place and was well funded, we keep seeing cases where it was done when the business was young. Now, 10 or more years later, the business has much higher revenues and value, and the “old” appraisal in longer valid. This means your client needs new, larger policies that adequately represent the present value of their business.
We also carefully examine disability insurance requirements in these cases. Think of the scenario where the business is supposed to have a disability policy in place on various partners but never gets it. Then, one of the partners has a disability event like an injury or serious illness and can’t work, but needs income. This is a big hit to the business. Not only is it down one productive person, but the other partners have to continue to pay the disabled partner. This leads to resentment, financial burden, lawsuits and other issues that again could be simply and cost effectively avoided.