Ask the business owner these questions to determine whether their current agreement needs to be updated:
IS THE AGREEMENT BETWEEN ALL OF THE OWNERS OR JUST SOME OF THE OWNERS?
A buy-sell agreement does not have to apply to all owners of a business, nor does it have to apply the same terms and conditions among the owners, but the owner should be aware of this discrepancy and the reasoning behind why the agreement treats owners differently.
WHAT ARE THE TRIGGERING EVENTS FOR THE BUY-SELL OBLIGATIONS?
Triggering events may typically include provisions for death, disability, incapacity, bankruptcy, loss of a professional license, divorce and/or retirement. If a buy-sell agreement lacks one of these important triggering events, it may be worthwhile to discuss this with the owner.
WHO IS DESIGNATED AS THE BUYER OF THE DECEASED OWNER'S INTEREST-THE COMPANY OR THE OTHER OWNERS?
Whoever has the obligation to buy a departing owner's interest in the business is usually the person (or entity) that will own the life insurance so that the financial obligations can be met at a triggering event. If the business owner has a buy-sell agreement and life insurance to fund the buy-sell, check to see if ownership of the insurance makes sense given the purchase obligations. For example, if the company is required to buy out a deceased owner's interest but a co-owner is the owner of the insurance, there may be a disconnect that needs to be addressed.
IS YOUR BUY-SELL ADEQUATELY FUNDED?
Typically a buy-sell should have provisions that address how a departing owner will be paid by the remaining owners. Common methods for funding a purchase obligation include: an installment sale, creating a sinking fund of investments for the future purchase, borrow money, and/or life insurance. Life insurance usually is the preferred method of funding.
IS THERE A MANAGEMENT SUCCESSION PLAN IN PLACE?
A management plan as part of the overall succession plan is especially important with family owned businesses as this is where the most conflict can occur at the death of a senior owner.
