The recent Supreme Court decision in Connelly v. United States emphasizes the importance of reviewing buy-sell agreements with careful attention to how they are funded. This ruling makes it clear that business owners relying on life insurance to fund buy-sell agreements need to reevaluate their strategies. Though this case focused on death, the lessons learned apply equally to disability. Insurance advisors must help their clients navigate the complexities of funding a buy-sell agreement, considering potential tax implications, valuation changes, and long-term planning.
As an insurance advisor working with privately held businesses, it's essential to regularly revisit succession planning with your clients—particularly every 3-5 years. A critical but often overlooked aspect of this planning is disability repurchase obligations. Business owners tend to focus on growth and day-to-day operations, so discussing future contingencies can be challenging. However, by addressing the following four key questions, you can initiate meaningful conversations and help clients prepare for a more secure future.
1. Do You Know the Value of Your Business?
An accurate business valuation is the cornerstone of effective succession planning, yet many owners have never formally valued their companies. This gap can lead to under preparedness, especially for businesses valued at $5 million or more, where a specialized approach is needed to address disability buy-sell funding requirements. Without a clear understanding of the business's worth, planning for the unexpected becomes much more difficult.
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2. Do You Have a Buy-Sell Agreement?
A buy-sell agreement is essential for establishing a succession plan in case a partner dies or becomes disabled. This legally binding contract provides several advantages: it names a buyer, protects spouses and heirs, and sets a predetermined sale price for the business. Without one, business owners risk leaving their legacy—and their loved ones—vulnerable to uncertainty and loss.
3. Has the Value of Your Business Changed? Have You Added or Removed Any Partners?
Business conditions are constantly evolving, and a buy-sell agreement should reflect these changes. A growing business can quickly outgrow its original agreement. For example, we recently worked with a commodities firm whose CEO's equity stake had increased by 250% since their last buy-sell agreement. The board realized that a disability buyout would be financially devastating to the company unless the agreement was revised.
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4. Are You Aware That Without a Buy-Sell Agreement, You Could End Up in Business with Your Partner's Spouse?
This often-overlooked reality can be a game-changer. In the event of a partner's death or disability, without a clear buy-sell agreement in place, their share could pass to their spouse or heirs—effectively making them your new business partners. For most entrepreneurs, the idea of losing control of their business is a far greater threat than disability or death. Succession planning allows business owners to safeguard the control they've worked so hard to build.
Most closely held businesses are heavily reliant on the vision, relationships, and expertise of their owners. These entrepreneurs form the bedrock of their companies' success, and without a well-designed and adequately funded buy-sell agreement, their passing or disability could spell disaster for both the business and their families. Starting the succession planning conversation today ensures a future where your clients retain control over their company, even in the face of the unexpected.
Ready to learn more? Schedule a meeting with our business development team to explore High Limit Buy-Sell Disability options tailored to your clients' needs.